When you begin a new business endeavor, it may take some time before you are “in the black” earning taxable income form your efforts. Once you are, however, your earnings will be subject to self-employment tax, as well as income tax. Self-employment tax is the tax a business owner must pay on income that parallels FICA, the Social Security payroll tax.

FICA tax is paid only on employees. If you are a sole proprietor, or shareholder in an S Corporation of LLC, it is unlikely that you are treated as an employee. In these situations, the income you derive from your business is passed directly through the business to you as the owner, and you are not subject to payroll taxes. Instead, the IRS requires you to make up for this difference via the self-employment tax.

An exception to this requirement applies to owners of corporations, typically called “C-Corporations”, that do not pass through income directly to their owners, but are taxed as a corporate entity. In this case, there is no self-employment tax. Income passed through a C Corporation to an owner is either in the form of a taxable dividend or to the owner as an owner-employee. In the latter case, payroll taxes must be withheld just as they are for any other employee. In either case, there is no self-employment tax to pay.

When self-employment tax is due, the tax is calculated as follows:

 

  • Social Security: 12.4% of the first $97,000 of self-employment earnings;
  • Medicare: 2.9%: on all self-employment earnings. There is no cap on the Medicare portion of the self-employment tax

 


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