In the United States, self employment (SE) tax is the tax primarily levied upon individuals who work for themselves — self-employed people. It is a Social Security and Medicare tax that is very similar to the taxes withheld from the wages of people employed by another person or business — employees.
Sole proprietors, owners of small businesses, and independent contractors are examples of self-employed people. You can be self-employed and work part time or full time as long as you are working for yourself. Basically, if you work for yourself and someone else does not pay your tax, you must pay this tax.
The self employment tax rate is subject to change, but as an example, in 2010 it was 15.3%. Medicare accounted for 2.9% and Social Security for the other 12.4%. The Social Security portion is based on the first $94,200 US dollars (USD) the taxpayer receives as income. Therefore, the most an individual would pay in terms of this portion is $11,680 USD. The Medicare portion of the tax does not have a cap on the income on which it is based; it is based on the taxpayer’s total income. For both of these portions of the tax, the taxpayer’s income includes combined wages, tips, as well as net earnings.
To pay self employment tax, the taxpayer must have a Social Security number (SSN) or, alternatively an individual taxpayer identification number (ITIN). SSNs may be applied for using Form SS-5. Non-resident aliens and resident aliens that do not have and are ineligible for a SSN will receive a ITIN from the Internal Revenue Service (IRS). ITIN applications may be made with a Form W-7.
The tax needs to be paid as you earn money throughout the year. You must make quarterly estimated tax payments if you think you will owe tax. Quarterly payments should be made using Schedule SE (Form 1040).
If you are self-employed and your net earnings are $400 USD or more, then you must pay self employment tax. Also, if you are a church employee with an earning income of just over $108 USD or more, then you must pay the tax.