 Income tax 2021-2022, self-employment SE tax. Get ready to get refunds to the max, dive it into income tax 2021-2022. Most of this information can be found in Publication 334, Tax Guide for Small Business Tax Year 2021 on the IRS website irs.gov, irs.gov. We're focused down here this time on the other taxes, specifically we're talking about the self-employment tax, which you could think of most likely or oftentimes applied to something like a Schedule C type of business for a sole proprietorship. The Schedule C then being reported on a separate schedule, basically an income statement, the net on which we would be calculating the self-employment tax typically, and the net of that Schedule C also flowing into Line 1 income up top. This is the first page of the Form 1040. If we had a Schedule C type of business, the net of it on that Schedule C would flow into the Schedule 1, and then it would flow in here to Page 1 of the Form 1040 Line Number 8. We also see we have this adjustment to income. That's going to be half of the self-employment tax that we're going to get a benefit of the above-the-line deduction here. This is the Schedule C profit or loss from business, basically an income statement. Bottom line of this number, in essence kind of like the net income for taxes, would then be rolling into the income line on the Form 1040 and possibly be subject to the self-employment tax, which would be calculated on the Schedule SE. This is the self-employment tax calculation noting that self-employment tax is basically the equivalent of the payroll taxes when you are self-employed. So if you are employee, you get payroll taxes withheld from your wages, from your employer, and the employer pays part of the self-employment kind of types of tax for the payroll taxes, that being social security and Medicare. For the sole proprietorship, the bottom line of the Schedule C, the net not the gross, the net then typically is subject to self-employment tax, which includes kind of equivalent of the employee and employer portions of like the payroll taxes on that net income. If you look at kind of the rates that are applied, that's the general concept. Okay, so self-employment tax, SE tax, the SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits. So in other words, when you think about these kind of benefit programs, you think about us putting money in during our working years, either through W-2 wages that are withheld or from paying into the self-employment tax if we're a sole proprietorship. And then at retirement or at retirement age, we might get the benefits from them. For example, the social security in particular, we might be receiving at that point in time. So if you're in retirement age, then if you still have income subject to self-employment, you still have to basically be paying in even though you're at the point in time that you're getting benefits from it because you're receiving income that's still subject to the self-employment. So, and also just realize when you think about these programs, we haven't really figured out whether they're actually kind of benefit or safety net programs, which means that they're going to be paying into it in order to help people that just need that money at retirement time. Or is it more like a federal retirement plan where everybody should be able to expect some money back? The Medicare, because it's a fairly small tax, you can think about as more of like a safety net type of program. And the social security because the tax is getting quite significant in terms of how much you pay in and because the benefits are being calculated based on in part how much money you put in, although there's a heavy phase out, so it's still got a safety net feel to it. Then it seems like that's going more towards like a federal retirement kind of program kind of thing. So keep that in mind as you go. So who must pay the SE or self-employment tax? Generally, you must pay self-employment tax and file schedule SE form 1040 if your net earnings from self-employment were $400 or more. So if you had a very small amount, maybe you don't have to report it, but that's pretty small. Use the schedule SE to figure net earnings from self-employment. So a sole proprietor or independent contractor. If you are self-employed as a sole proprietor or independent contractor, you generally use schedule SE form 1040 to figure your earnings subject to the self-employment tax, the SE tax. Self-employment tax rates, the 2021 self-employment tax rate on net earnings is 15.3, 12.4 for the Social Security plus 2.9 for Medicare. So if you're used to be payroll taxes, those might seem high because they're basically double the payroll half or the employer half because you're basically paying the employee and employer half in essence. In other words, if you're used to the W2 withholdings, you're probably used to the rate of the .062 or 6.2% times 2, that's where we get the 12.4 because it's the employee and employer portion. On the Medicare side, if you're used to withholdings, you see .0145 and if I multiply that times 2, then you got the 2.9, so that's where they're coming up with. Obviously, if you take that 2.9 plus the 12, if I take the 2.9 plus the 12.4, that's where we get to the 15.3 about percent, not about exactly the 15.3 percent that is the total. Now that 15.3, you got to be careful using that one because you kind of have to break it out in some cases between the 12.4 Social Security and the 2.9 for Medicare because Social Security has a cap on it. If your income goes over a certain cap, then it stops. So that's why you kind of have to break it out and Medicare might have an added kind of amount that you have to pay over a certain threshold. So it gets a little bit more confusing software, obviously helpful. So earning subject to the self-employment tax, only the first 142,800 of your combined wages tips and net earnings in 2021 is subject to any combination of the 12.4 Social Security part of the self-employment tax, Social Security tax, or the tier one part or the railroad retirement tax. That's why you have to break it out to the Social Security and Medicare because the Social Security has that cap of 142.8. So in other words, if you made 200,000 net on your schedule C subject to self-employment tax for the Social Security, it would be capped out at the 142, 142.8 times the point 12.4. So you'd be capped out basically at that amount. So you would have to ask why is that the case? That seems like it's benefiting people that are more well off. And that kind of gets to this argument of is the Social Security tax a safety net or is it kind of like a retirement program? Because if it was a safety net, you would think it would be a smaller amount that you're paying into it and it would only be benefiting those that are in need at retirement. What's really happening is when you get the money back at retirement, it's based in part by how much money you put into it, which sounds more like kind of like a retirement plan, although it's heavily phased out as your income goes higher. So the fact is that you don't get any benefit from the payout at retirement after you get over a certain threshold and that's why you kind of have a cap. People always argue about the cap. The cap typically goes up each year, but there's typically going to be a cap on the Social Security side of things. All of your combined wages, tips and net earnings in 2021 are subject to any combination of the 2.9 Medicare part of Social Security tax. So if you've made the 200,000 on the Medicare part, you would still have to pay over the cap of the 142 for that 2.9% subject to the Medicare as opposed to the Social Security. So that's the Medicare tax or Medicare part of the railroad retirement. If your wages and tips are subject to either Social Security tax or the tier one part of the railroad tax or both and total at least 142.8, do not pay the 12.4% security part of the Social Security tax on any of your net earnings. However, you must pay the 2.9 Medicare tax of part of the self-employment tax on all of your earnings. So also note that this gets kind of confusing if, for example, you have multiple schedule C's that are for the same person on the tax return. So now you've got combined schedule C's that are going over the 142.8 cap and or if you have other W2 income, which is subject to the Social Security, even though you're only paying half of it there as the employee, then you also have this kind of cap problem, which is going to get more complex software helping out a lot. Additional Medicare tax, a .9 additional Medicare tax may apply to you if your net earnings from self-employment exceed a threshold amount based on your filing status. So now you've got different thresholds based on the filing status where the Medicare tax goes up because it's a safety net type of program whereas the Social Security seems more like a retirement program. So the Social Security is capped. You don't pay any more over a certain threshold and the safety net program actually goes up. Once you go up a certain threshold, in that case, these seem like pretty basic kind of rules, but if you get into payroll taxes and more complex Social Security kind of calculations, these get confusing quick because now you're putting in a layer of progressive tax rates into it, tax rates changing instead of having a flat tax, which makes things way confusing like pretty fast if you're trying to do projections at least or something like that. So for more information, you can see self-employment, SE tax in Chapter 1, a form 8959 and its instructions, special rules and exceptions. So we have aliens, generally resident aliens must pay self-employment tax under the same rules that apply to U.S. citizens. Non-resident aliens are not subject to self-employment tax unless an international Social Security agreement, also known as a totalization agreement, in effect determines that they are covered under the U.S. Social Security system. This becomes complicated because as we saw that if we look at the Social Security tax, it sounds more like it's a benefit program as opposed to the Medicare, which is kind of a safety net program. So the Medicare, because it's fairly small and you think you're kind of giving money into a system to support people that are in need at some point in time, that everybody might be subject to that part, but if you're thinking of it more as like a program that should be giving you the benefits back, based on how much you put into it, if you're talking about people that aren't citizens, then it doesn't seem fair to basically cut their wages by the amount that's going into this pretty significant amount of tax going into Social Security. If they're not going to get the benefit at retirement of receiving the benefits from the Social Security, and that's where, of course, the problem comes in. So the question is, if they're putting money in, you would think that they should be able to be getting the benefits if we're thinking of it as a retirement type of program as opposed to a benefit type of program. So that's kind of the general idea. So however, residents of the U.S. Virgin Islands, Puerto Rico, Guam, the Commonwealth of North, Mayan Islands, and American Samoa are subject to self-employment tax as they are considered U.S. residents for SE tax purposes. So for more information on aliens, you can see publication 519, U.S. Tax Guide for Aliens. Special rules and exceptions. Child employment by parent. You are not subject to self-employment tax if you are under age 18 and you are working for your father or mother and church employee. If you work for a church or a qualified church-controlled organization other than a minister member of the religious order or a Christian science practitioner that elect an exemption from Social Security and Medicare taxes, you are subject to self-employment tax if you receive $108.28. That's a pretty funny number. You can see when they use these numbers that are kind of old, they haven't really changed them over. $108.28. Okay, when did you make that law that, you know, that you put that number? And that's funny, it must be okay. So or and wages from the church or organization. So for more information, see publication 517. You can find that on the IRS website for Social Security and other information for members of the clergy and religious workers. We got the special rules and exemptions continued, fishing crew members. So if you are a member of a crew on a boat that catches fish or other water life, your earnings are subject to the self-employment tax if all the following conditions apply. One, you do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch unless the pay meets all the following conditions. A, the pay is not more than $100 per trip. B, the pay is received only if there is a minimum catch. And C, the pay is solely for additional duties such as mate, engineer or cook for which additional cash pay is traditional in the fishing industry. Two, you get a share of the catch or share of the proceeds from the sale of the catch. Three, your share depends on the amount of the catch. The boats operating crew normally numbers fewer than 10 individuals and operating crew is considered as normally made up of fewer than 10. If the average size of the crew on trips made during the last four calendar quarters is fewer than 10. So there's various special rules for fishing for some reason, specialized kind of industry. I'm not in that specialized industry. So if that applies to you, you're going to have to dig a bit deeper to make sure that you got things lined up properly there. Special rules and exceptions. We've got the notary public. Fees you receive for services you perform as a notary republic are reported on Schedule C but are not subject to the self-employment tax. You can see instructions for the Schedule SE Form 1040. We've got the state or local government employees. You're subject to self-employment tax if you are an employee of the state or local government are paid solely on a fee basis and your services are not covered under a federal state social security agreement. Continuing on with the special rules and exceptions, foreign government or international organization employee, you are subject to self-employment tax if both the following conditions are true. One, you are a U.S. citizen employed in the United States Puerto Rico, Guam, American Samoa, the Commonwealth of Northern Moyan Islands, or U.S. Virgin Islands by A, a foreign government, B, a wholly owned agency of a foreign government or C, an international organization and two, your employer is not required to withhold social security and Medicare taxes from your wages. Special rules continued. U.S. citizen or resident alien residing abroad. If you are self-employed U.S. citizen or resident alien living outside the United States, in most cases, you must pay the self-employment tax. Foreign earnings from self-employment can't be reduced by your foreign-earned income exclusion when computing self-employment tax, exception, the United States has social security agreement with many countries to eliminate double taxation under two social security systems, and so obviously that's going to be part of the problems with people living abroad. You don't want to have the double taxation that could be applied and so hopefully, you know, there's an agreement that's going to be made so that there's, you know, who gets the tax and so on. Under these agreements, you must generally only pay social security and Medicare taxes to the country in which you live. The country to which you must pay the tax will issue a certificate that serves as proof of the exemption from social security tax in the other country. For more information, see the instructions for Schedule SE Form 10-4-D. More than one business, so you could have multiple businesses involved. If you have earnings subject to self-employment tax from more than one trade, business, or profession, you must combine the net profit or loss from each to determine your total earnings subject to the self-employment tax. A loss from one business reduces your profit from another. So you might have one business with a loss, one with a profit. A loss from one business reduces the profit from the other. Community property income, if any of the income from a trade or business other than a partnership is community property income under state law. So we have different states that have the community property states. It is included in the earnings subject to self-employment tax of the spouse carrying on the trade or business. A gain or loss do not include any earnings subject to self-employment tax, a gain or loss from the disposition of property that is neither stock and trade nor held primarily for the sale to customers. It does not matter whether the disposition is a sale, exchange, or involuntary conversion. Loss income payment. If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the loss business income is included in earnings subject to self-employment. If you are not working when you receive payment, it still relates to your business and is included in earnings subject to self-employment even though your business is temporarily inactive.