A typical paycheck for an employee usually shows gross earnings, deductions for tax, insurance, retirement or other deductions, and net earnings. One of the tax deductions funds the federal Social Security program. For earnings in 2012, the tax is 13.3% and is broken down into two parts: 10.4% payable to Social Security and 2.9% to Medicare.
Currently, employees contribute 4.2% of earnings to Social Security and 1.45% to Medicare from each paycheck. Employers are required to match the 1.45% for Medicare and remit 6.2% of each employee’s earnings for Social Security. The contributions are made through payroll deductions and payroll tax forms.
U.S. taxpayers operating a business as a sole proprietorship or partnership are required to pay both parts of this tax on earnings generated from self-employment of $400 or more per year. The self-employment tax is due annually and reported on federal Schedule SE, Self-Employment Tax. Schedule SE is filed with the taxpayer’s Schedule C, Profit or Loss from Business (Sole Proprietorship) and Form 1040, U.S. Individual Income Tax Return. All forms and instructions are available online through the Internal Revenue Service (IRS).
For 2012, the 10.4% Social Security contributions are capped and payable only on the first $110,100 earned during the year. Additional earnings are not subject to the tax. The 2.9% Medicare tax part of this deduction does not have an earnings cap so the tax continues to be incurred on earnings over $110,100. This limit is set by federal law and usually changes annually.
As a sole proprietor or partner, a portion of the self-employment tax can be considered an expense and is deductible on the Form 1040 tax return under the Adjusted Gross Income section on page 1. Please note: this deduction only affects federal income tax liability. It does not affect self-employment net earnings or factor into the calculation of self-employment tax.
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