Working without a boss is the American dream. You can run the business however you see fit. Whether you’re a small business with employees or a freelance graphic artist, there’s a great sense of freedom and satisfaction.
Self-Employment Contributions Act
The Self-Employment Contributions Act (SECA) tax refers to taxes owed by the self-employed. It is their version of the tax paid by employers and employees for Medicare and Social Security. It’s due on your net earnings for self-employment.The SECA is the self-employed version of the Federal Insurance Contributions Act (FICA). When you’re employed the employer pays half this tax and the employee pays the other half.
But when you’re self-employed, you pay the whole tax. The SECA is based on 92.35 percent of your net earnings.
- Sole proprietors
- Freelancers
- Independent contractors who have a trade or business
- Members of a partnership that carries on a trade or business
SECA Tax Rates
When you were employed, you paid 6.2 percent of your FICA, and your employer also paid 6.2 percent. But that has changed. Now, you'll pay 12.4 percent of your net income.For 2023, the Social Security tax only applies to the first $160,200 of self-employment income. In 2024, it increased to $168,600.
You are also charged for Medicare. It was originally split between your employer and you, but now you pay the entire 2.9 percent. There’s no cap on income for this tax.
But there is an exception for high earners. The Affordable Care Act changed the amount higher earners were required to pay for Medicare. If you earn above $200,000 for single filers or $250,000 for married filing jointly, you are required to pay an additional 0.9 percent Medicare tax.
- April 15
- June 15
- September 15
- January 15
Reducing Self-Employment Taxes
The self-employment tax is considered a tax-deductible expense by the IRS. The IRS allows you to deduct half of the tax rate from your taxable income, which represents the amount an employer would have paid.Your taxable rate now decreases to 7.65 percent and represents half of the 15.3 percent rate stated previously.
For example, let’s say your net self-employment income is $50,000. Only 92.35 percent is taxable income. This brings the amount of taxable income subject to the SECA to $46,175.
Is the SECA Required for a Side Gig?
Whether working as a handyman on the side or selling items on Etsy, Uncle Sam is following you. You are required to not only pay income taxes but you must pay Social Security and Medicare taxes. This is necessary only if your income is above $400.The SECA taxes fund your Social Security and Medicare benefits and will affect in the long term how much you receive when you start receiving benefits.
Are Limited Liability Company (LLC) S Corp Owners Subject to SECA?
With an S corporation, it depends on whether you, as an owner or employee, are paid wages.Employees or owners who are paid with wages, have these wages considered as earned income. As a result, they are subject to FICA tax for Social Security and Medicare from the S corp.
Other net earnings that are passed through to the owners and are considered dividend income.
Self-Employment Taxes Similar to Employee Taxes
Whether you are self-employed or an employee you still must pay a tax for your Social Security and Medicare. You are not exempt. Unfortunately, this is in addition to your regular income taxes.However, because half of the SECA tax is deductible, there is little relief.
Side hustles may also be required to pay SECA taxes so check with your accountant to see what applies to you. And with an S corp, you can’t have pass-through income, or you’re subject to SECA taxes as well.
