Small Business Taxes & Management^TM--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.

--Last Update 12/26/14