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Brand-new business owners are sometimes surprised to find out that in addition to their federal income taxes, they must also pay a significant percentage of their income to the government in the form of SECA taxes.
The Self-Employment Contributions Act (SECA) tax is basically the business owner's version of the FICA tax that employees pay. Like FICA, it is made up of your "contributions" to both the Social Security and Medicare programs. However, the basic tax rate for the self-employed under SECA is 15.30 percent -- twice the 7.65 percent rate that employees must pay on their paychecks as FICA tax -- to reflect the fact that employees and employers pay one-half the FICA tax and employers pay the other half.
For 2011, the SECA rate was 13.50 percent to provide business owners with the same tax advantage employees realized from the two percent reduction in the employee portion of the FICA tax. This reduction is extended through February 29, 2012 -- after that, the fact of the reduction rests in the hands of Congresss.
What income counts? For starters, you don't have to worry about paying the SECA tax at all if your total business income, from all Schedule Cs combined and from any partnership or S corporation income that is treated as self-employment income, is less than $400. But if your total income is $400 or more, you must file a Schedule SE and pay SECA tax on your entire net business income, including the first $400.
If you are filing jointly and your spouse also files one or more Schedule Cs, each spouse must count his or her own income separately.
Since it's the net income from your business that is the basis of SECA tax, certain types of income are not included:
Farmers. Farmers who file Schedule F with their Form 1040 must include as self-employment income their net income from farming, as shown on Line 36 of their Schedule F.
Some special rules apply to the following:
Once you know what types of income to count, you can: