 Looking at the income tax formula we're focused on line one income remember on the first half of the income tax formula is in essence an income statement although just an outline other forms and schedules flowing into these line items one of those being the schedule C it having business income minus business expenses the net business income flowing into line one income of the income tax formula looking at the page form page one of the form 1040 remembering the schedule C flows into the schedule one which flows into the first page of form 1040 line number eight the schedule C is a profit or loss from business in essence an income statement format income minus expenses we now want to think about the the self-employment tax and recall that when we talk about the self-employment tax in general it's similar to the payroll taxes that you may have or would have if you were a w2 employee where you would be paying half the self-employment tax as the employee and the employer would be paying half the self-employment tax when we talk about the schedule C we don't have any payroll if we are our own employees in other words we might have other employees that we deal with payroll but if we don't have any other employees or if we do have the other employees then we're not our own employee we're not issuing ourselves a w2 in a schedule C situation typically instead we're going to in essence take the income statement the income minus the expenses and the net income is what we will then use to figure the self-employment tax which is equivalent in some ways to that payroll taxes and it basically means that we're going to act as the employer and employee for the self-employment tax that we're going to have to be calculating and paying half of that self-employment tax possibly being an above the line deduction on a schedule one all right that's the general overview we'll get into it in a little bit more detail now so we got the self-employment tax the s e tax caution the s e tax rules apply no matter how old you are and even if you are already receiving social security and medicare benefits so when we think about self-employment tax notice that you you all you often hear so social security you think of when you're paying into social security or you might be thinking of when you're getting the money out from social security in retirement remembering that social security used to be thought of as more of a safety net program but it's now almost thought of as more of a government funded basically or we put into this government program for everybody's partial retirement program in essence and therefore if you put money into social security you expect to get something in return from social security although i wouldn't completely bet on that if you're a younger individual because the social security is having you know it's going to run into a wall somehow unless they make some changes to it at some point in time but that's the general concept of it we of course are talking here about the pain into the social security system when you have your own business and doing so therefore not through the payroll taxes but the self-employment tax all right who must pay the self-employment tax the se tax generally you must pay se self-employment tax and file schedule se form 1040 if your net earnings from self-employment were $400 or more so clearly if you have a loss on your schedule see income you're not going to be having the self-employment tax because it's going to be subject or based on your income in a similar way is if you are a w2 employee your income from the employer is what the basis is to figure the self-employment are in that case the payroll taxes social security medicare and this case the income to us is the net income from the schedule see that's going to be the starting point to calculate the social security and medicare if we didn't have any income or if we had a loss from that then we're not going to be paying the social security medicare so use schedule se to figure net earnings from self-employment so sole proprietor or independent contractor if you are a self-employed as a sole proprietor or independent contractor you generally use schedule se form 1040 to figure your earnings subject to self-employment tax self-employment tax rate so the 2022 se self-employment tax rate on net earnings is 15.3 12.4 social security tax and 2.9 medicare tax let's break that down in a little bit more detail here so if i pull out the trustee calculator we're going to say i'm trying to make it smaller not bigger all right so if you had your w2 withholdings as opposed to the self-employment tax and you were to look at your pay stub then the the rate for social security is usually 0.062 so and then the and then if you double that times two that gets to that 12.4 so the 12.4 percent is the employer and employee portion like equivalent to the employer employee portion if you were a w2 employee and you had an employer and employee portion that's so on our net income on the schedule c we're paying the equivalent of the employer and employee portion in essence so similar kind of thing for the 2.9 if you were to look at like a w2 withholding it would be 0.0145 the employee portion times two for the employer portion as well and hold on a second 0.0145 times two that's going to be if i move the decibel two places over 2.9 and if i add that to the 12.4 uh hold on a second if i take the 12.4 plus the 2.9 that's going to get to that 15.3 so there's there's where they're getting that 15.3 now you still need to be able to break out between the social security rate and the medicare rate because there could be some differences if you go over the cap or the threshold for social security then you're not going to have to pay any more social security above that amount we'll talk about that a little bit later so you have to think of these these rates different not just the 15.3 all the time and if you make a lot of income you might have to pay added medicare taxes over a certain threshold as well all right so maximum earnings subject to s e tax only the first 147 000 of your combined wages tips and net earnings in 2022 is subject to any combination of the 12.4 social security part of s e tax social security tax or the tier one part of railroad retirement tax so now that 147 so if your income minus your expenses on on your schedule c for example came up to 200 000 you would think that you would have to be paying the the tax on the 200 000 but no for the social security portion only you have the cap at 147 000 why would that be you might ask that seems odd why why would I stop paying taxes over that threshold because it's not a general tax here because we think of social security more as a retirement program or something that everybody should get a benefit from and therefore you have to kind of compare it to the to the calculations of the benefits that you're going to be getting so in other words the higher you the more money you put in the social security the more you should get back if we think about it as like a retirement type of program and the benefits of course are are reversed structured so that as your as your income goes up your benefit the amount of benefits you get in payments in retirement goes down and after you hit a certain threshold then you don't get any more benefit when you on the benefit side if you put more money in so that's kind of the justification of a cap on the social security because you're not getting any more benefit as you keep putting more money into the social security when you are at retirement age all right so we don't have that cap on the medicare side of things you'll you'll note so because and that would be maybe because we still think of medicare more as a safety net program not as like a like a government kind of sponsored retirement kind of fun program so all of your combined wages tips and net earnings in 2022 are subject to any combination of the 2.9 medicare part of the tax medicare tax or medicare part of railroad retirement tax if your wages and tips are subject to to either social security tax or the tier one part of railroad retirement tax or both and total at least 147 000 do not pay the 12.4 social security part of the se tax on any of your net earnings however you must pay the 2.9 medicare part of the se tax on all your net earnings okay so there's the cap applied just to the social security side not to the medicare side and then if we go to the medicare master what is medicare side addition we have this additional medicare tax if your income goes above a certain amount so a 0.9 percent additional medicare tax may apply to you if your net earnings from self-employment exceed a threshold based on your filing status so you can take a look at for more information self-employment tax in chapter one and form eight nine five nine and its instructions