The SECA tax rate is 15.3%, which is assessed on 92.35% of your net earnings from self-employment. The 15.3% SECA tax rate breaks down into 12.4% for Social Security taxes and 2.9% for Medicare taxes.
Alternate name: Self-employment tax Acronym: SECA tax
How To Calculate the SECA Tax
Net earnings is calculated by subtracting your ordinary and necessary business expenses from your gross self-employment income. Let’s say you grossed $150,000 and have $50,000 in ordinary and necessary business expenses. You would owe $14,129.55 in self-employment taxes, assuming you have no other earned income during the year. Here’s how that breaks down:$150,000 - $50,000 = $100,000 $100,000 x 92.35% = $92,350 $92,350 x 15.3% = $14,129.55
How Does the SECA Tax Work?
Unlike the Federal Insurance Contribution Act (FICA) tax, which is paid through an employee’s withholdings, self-employed taxpayers are responsible for paying their SECA tax obligation themselves through estimated tax payments every quarter, through a payment made along with an extension of time to file their tax return, and/or through a payment made when filing their income tax return. Although you should generally estimate your SECA tax throughout the year as part of determining your quarterly tax due, your actual SECA tax liability for the year is calculated on Schedule SE, which is submitted along with Form 1040. Schedule SE uses information calculated on Schedule C, on which you calculate your net earnings from self-employment. You do not make separate SECA tax payments and regular income tax payments; they are generally combined and paid together. That said, because the SECA tax is paid in addition to regular income taxes, it is possible for you to owe SECA tax but owe no regular income tax. This is generally the case when you have net earnings from self-employment of at least $400 but your net taxable income from the year is less than the standard deduction amount for your filing status.
Types of SECA Tax
The SECA tax has two components: the Social Security tax and the Medicare tax.
Social Security Tax
The Social Security component of the SECA tax is equal to 12.4% of 92.35% of your net earnings from self-employment. However, there is an annual wage base limit. For the tax year 2022, only the first $147,000 of combined wages, compensation, and self-employment income is subject to the Social Security component of the SECA tax. This amount is known as the annual Social Security wage base limit, and it changes every year. In 2023, the wage base limit is set higher at $160,200. For example, let’s say you earned $150,000 in 2022 from all wages, compensation, and self-employed income. You would only pay the Social Security component of the SECA tax on the first $147,000. The Social Security tax would not apply to $3,000 of your earnings since that is the income above the wage base limit.
Medicare Tax
The Medicare component of the SECA tax is equal to 2.9% of 92.35% of your net earnings from self-employment. Unlike the Social Security tax, the Medicare tax does not have a wage base limit. The tax is assessed on your combined net earnings from wages, compensation, and self-employment income.
Additional Medicare Tax
If your combined wages, compensation, and self-employment income exceed a certain amount for your filing status, you are subject to pay an Additional Medicare Tax of 0.9% on wages, compensation, and self-employment income. This tax is not considered part of the SECA tax. The income thresholds for paying the Additional Medicare Tax are as follows: The difference between these two taxes is who pays them. Self-employed individuals pay the SECA tax, while employees and their employers pay the FICA tax. The FICA tax is broken down like this:
Social Security: 1.45% for the employer and 1.45% for the employeeMedicare: 6.2% for the employer and 6.2% for the employee
Do I Need To Pay the SECA Tax?
If in 2021 your net earnings from self-employment were $400 or more and you do not make more than $142,800 from other employment, or you earned $108.28 in church-employee income, you likely need to pay the SECA tax. But if you have less than $400 of net earnings from self-employment for the given year, you will generally not have to pay the SECA tax for that year. The SECA tax rates for self-employment income are the same in 2022, but with a higher wage threshold at $147,000. However, it is possible to obtain an exemption from the SECA tax using Form 4631 if you are an ordained minister of a church, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner.
How Much Is the SECA Tax?
The SECA tax is generally 15.3% of 92.35% of your net earnings from self-employment income. However, if you have other wages and compensation subject to the FICA tax, it is possible that some or all of your net earnings from self-employment income will be exempt from the 12.4% Social Security component of the SECA tax. If you have to pay the SECA tax, you’re eligible to deduct one-half of the SECA tax amount on your individual tax return. This deduction is to give you some benefit for paying the “employer” portion of their Social Security and Medicare tax obligations on top of the “employee” portion.
Criticism of the SECA Tax
Some taxpayers have argued with the IRS over the belief that they should have the right to waive their Social Security benefits and therefore be returned the Social Security taxes they paid over their lifetime. Naturally, these taxpayers would not be interested in paying the SECA tax. Another criticism of the SECA tax is that due to the Social Security wage base limit, the SECA tax is a regressive tax that has a higher effective rate for those who make less than $142,800 than for those who make more than $142,800. The same argument applies to those on either side of the $147,000 threshold in 2022.
