Small Business Taxes & Management


Self-Employment Income Subject to SECA Tax


Small Business Taxes & ManagementTM--Copyright 2014, A/N Group, Inc.


The self-employment tax (sometimes called SECA) is analogous to the Social Security and Medicare taxes. The big difference here is that a self-employed individual pays both the employee's and employer's portion. An employee pays 7.65% and his employer pays a like amount. The computation is slightly more complex. There is a broad range of income that qualifies for the self-employment tax; and in some cases the requirement to pay the tax is based on other factors. The list below describes the most frequently encountered types of income.


Amounts Subject to Self-Employment Tax

___ Partnership (or LLC) income or loss (limited partners include only guaranteed payments for services rendered)*
___ Net earnings from a sole proprietorship
___ Share farming (producing crops on another's land for a share of crops or livestock)
___ Farm rental income if you materially participated in production or management
___ Cash or payment in kind from Department of Agriculture for land diversion program
___ Payments for rooms or other space if you provide substantial services (e.g., boarding house)
___ Sale of newspapers and magazines if you're age 18 or older and kept the profits
___ Current or former self-employed insurance agents and salespersons (can include amounts after received after retirement)
___ Income of certain crew members of fishing vessels
___ Amounts received as a state or local government employee if paid on feed basis and job not covered under federal-state social security agreement
___ Interest received in course of business (e.g., interest on accounts receivable)
___ Fees and other amounts received for services as a director of a corporation
___ Recapture amounts under Sec. 179 and 280F included in income because business use of property dropped below 50%
___ Amounts received as a professional fiduciary (amounts received as a nonprofessional only if actively participating in operation of estate's business or estate requires extensive management)
___ Gain or loss from Sec. 1256 contracts by an options or commodities dealer
___ Income earned as a U.S. citizen employed by a foreign government
___ Self-employment income in bankruptcy cases
___ Church employee income of $108.28 or more
___ Royalties from books (but royalties from a single book may be excluded)
___ Amounts received from working interests in oil and gas wells
___ Business interruption insurance (IRS claims subject to SECA; Tax Court has ruled otherwise)
___ Selling or soliciting the sale of consumer products
___ Licensed real estate agents

Amounts Not Subject to Self-Employment Tax

___ Notary public fees
___ Income received as a retired partner under written partnership plan
___ Income from real estate rentals (except amounts received as a real estate dealer)
___ Income from farm rentals if you did not materially participate in production or management
___ Payments from the Conservation Reserve Program if you are receiving social security benefits for retirement or disability
___ Gains or losses on the sale of property (unless you're a dealer in such property)
___ Noncompete payments
___ Termination payments received as a former insurance salesperson (but certain conditions must be met)

* Whether or not a limited partner or LLC member is subject to the self-employment tax will depend on the individual's services performed.

Note. The list above is not complete. In addition, whether or not you're subject to the self-employment tax frequently depends on the facts and circumstances. For example, while working as a financial analyst you purchase a classic car and spend six months restoring it. You sell it for a $5,000 profit. While you owe income tax on any net gain, chances are you don't owe the self-employment tax. On the other hand, if you repeat the activity for three cars during the year, that would subject you to the self-employment tax. Discuss this with your tax advisor.


Copyright 2014 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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--Last Update 12/26/14