I remember a scene from a TV show where the character gets her first paycheck.  She is very excited at the prospect of spending the hard-earned money.  She pulls the check from the envelope and a disappointed look comes over her face.  She asks her friends, “Who is FICA?”

Many people are well acquainted with FICA and its ability to suck the joy out of a paycheck.  FICA consists of Social Security and Medicare taxes.  FICA has a cousin that goes by the name of the self-employment tax.  The S/E tax has a tendency to suck the joy out of a hoped-for tax refund of the uninitiated and unsuspecting.

The self-employment tax generally applies to people who receive income from a business.  This “business” can be a sole proprietorship, an LLC or partnership interest, or even a position paid as an independent contractor.  That’s right, the income reported on any 1099 you receive for commissions, consulting, or other services is subject to self-employment tax.  The S/E tax is the same Social Security and Medicare tax that employees pay, except that it consists not only of the employee, but the employer portion of Social Security and Medicare as well.  You didn’t know that your employer paid FICA too?  Now you do.  Since business owners are their own employer, they have to pay both portions.

The rate for self-employment tax is 15.3%.  Social Security is 12.4% and Medicare is 2.9%.  In 2010 the rate is actually 13.3% because the employee portion of Social Security was reduced 2%.  President Obama has called for other rate reductions in his jobs package, though these are not yet passed.

It’s important for business owners and independent contractors to know self-employment tax will be assessed on their earnings and reported on their individual income tax return.  As with everything, there are some exceptions (S-corporation owners are one), but most business owners will find it necessary to take S/E tax into consideration when quarterly estimated tax payments are calculated, so April 15th comes and goes with no major surprises.

 Greg Tanner – is a Tax Principal at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.