People who are self-employed have to pay the Self-Employed Contributions Act (SECA) tax. They pay taxes on a part of their net income to help pay for programs like Social Security and Medicare.
Self-Employed Contributions Act: What It Is and How It Works
Self-Employed Contributions Act: If you are self-employed, you pay this tax to help pay for Social Security and Medicare. You must pay the SECA tax if you have $400 or more in net self-employment earnings or $108.28 in church-employee income in a given year.
The Self-Employed Contributions Act rate is 15.3%, which is taken out of 92.35 percent of your self-employment net earnings. The 15.3% Self-Employed Contributions Act rate is made up of 12.4% in taxes for Social Security and 2.9% in taxes for Medicare.
- Alternate name:- Self-employment tax
- Acronym: SECA tax
How to Figure Out Your Self-Employed Contributions Act
To figure out your net earnings, take your gross income from self-employment and subtract your normal and necessary business costs.
Let’s say you made $150,000 in sales and spent $50,000 on normal and necessary business costs. If you don’t make any other money during the year, you would have to pay $14,129.55 in self-employment taxes. This is how it works out:
$150,000 – $50,000 = $100,000
$100,000 x 92.35% = $92,350
$92,350 x 15.3% = $14,129.55
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How do you pay the SECA tax?
Self-employed taxpayers must pay their Self-Employed Contributions Act obligation by quarterly estimated tax payments, a payment with an extension of time to submit their tax return, or a payment with their income tax return. Employees pay their FICA tax through withholdings.
Schedule SE, submitted with Form 1040, calculates your annual Self-Employed Contributions Act liability. Schedule SE calculates net self-employment earnings from Schedule C.
SECA and income taxes are usually paid jointly. However, since the Self-Employed Contributions Act is paid in addition to regular income taxes, you may owe the Self-Employed Contributions Act but not regular income tax. When your net self-employment earnings are at least $400 but your net taxable income is less than the standard deduction for your filing status, this is usually the case.
Note:- Individuals calculate SECA taxes. Even if a married couple files jointly, each spouse’s SECA tax due for the year is determined separately from their spouse’s.
Types of SECA Tax
The SECA tax has two components: the Social Security tax and the Medicare tax.
Social Security Tax
12.4% of 92.35% of self-employment earnings is the SECA tax’s Social Security component. An annual wage base restriction applies.
The Social Security component of the SECA tax applies to the first $147,000 in wages, compensation, and self-employment income in 2022. The Social Security wage base limit adjusts annually. The wage base limit rises to $160,200 in 2023.
In 2022, you earned $150,000 through salary, compensation, and self-employment. Social Security only applies to the first $147,000 of SECA tax. $3,000 above the wage base level is exempt from Social Security tax.
Medicare Tax
2.9% of 92.35% of self-employment earnings is the SECA tax’s Medicare component.
Medicare has no wage base limit, unlike Social Security. Wages, compensation, and income from self-employment are subject to taxation.
Additional Medicare Tax
An Additional Medicare Tax of 0.9% applies to wages, compensation, and self-employment income over a certain amount for your filing status. This tax is not SECA.
The income thresholds for paying the Additional Medicare Tax are as follows:
| Filing Status | Income Threshold |
| Single | $200,000 |
| Married Filing Jointly | $250,000 |
| Married Filing Separately | $125,000 |
| Head of Household With Qualifying Person | $200,000 |
| Qualifying Widow(er) With Dependent Child | $200,000 |
SECA Tax vs. FICA Tax
Both the SECA tax and the FICA tax pay for the same things, like Social Security and Medicare.
Who pays these two taxes is what makes them different. Self-employed individuals are responsible for the SECA tax, whereas employees and their employers contribute to the FICA tax. The structure of the FICA tax is as follows:
- Social Security: 1.45% for the employer and 1.45% for the employee
- Medicare: 6.2% for the employer and 6.2% for the employee
The SECA Tax has been criticized
Some taxpayers have taken legal action against the Internal Revenue Service (IRS) for denying them a refund of the Social Security taxes they paid after deciding not to accept their benefits. So, it makes sense that these taxpayers wouldn’t want to pay the SECA tax.
Due to the Social Security wage base limit, another complaint about the SECA tax is that it is a regressive tax with a higher effective rate for those who make less than $142,800 than for those who make more. In 2022, people who make more or less than $147,000 have the same argument.
Key Takeaways
- The Self-Employed Contributions Act (SECA) tax is paid on 92.35 percent of your net income from self-employment. This tax helps pay for programs like Social Security and Medicare.
- Most people don’t have to pay the SECA tax if their income from self-employment is less than $400 for the year.
- The SECA tax rate is usually 15.3%, but the Social Security wage base limit means that some self-employed people may have a different effective rate.
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