You are self–employed for this purpose if you are a sole proprietor, an independent contractor, a partner in a partnership, a member of a single-member LLC or are otherwise in business for yourself. You usually must pay self–employment tax if you had net earnings from self–employment of more than an amount specified by law. Generally, earnings subject to self–employment taxes is 92.35% of your net earnings. Net earnings are calculated by subtracting ordinary and necessary trade or business expenses from your gross self-employment income. You can be liable for paying self–employment tax even if you are currently receiving social security benefits.
If you had a small profit or net loss from your business but want to pay into the social security system, you may be eligible to use one of the two optional methods to compute your net earnings from self–employment. Refer to the Form 1040, Schedule SE Instructions to see if you qualify to use an optional method. An optional method may increase your earned income credit or the child and dependent care credit.
The total self-employment tax rate is a percentage set by law of your net earnings from self–employment. This rate is the total of a percentage for Social Security and a percentage for Medicare. There is a maximum amount of net earnings subject to the social security tax that is set by law. All of your net earnings are subject to the Medicare tax. Self–employment tax is computed on Form 1040, Schedule SE (PDF). When figuring your adjusted gross income on Form 1040, you can deduct one–half of your self–employment tax. This deduction is figured on Form 1040 Schedule SE. The Social Security Administration uses the information from Schedule SE to figure your benefits under the social security program.
If you are an employee of a church or qualified church–controlled organization that elected exemption from social security and Medicare taxes, and you are not yourself exempt from self-employment tax, you must pay self–employment tax if you are paid more than an amount specified by law in a year from the church or qualified church-controlled organization. If you are required to pay self–employment tax, you must file Form 1040 and attach Schedule SE. For more information on church related income and self–employment taxes, refer to Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
More information on self–employment tax can be found in Publication 334, Tax Guide for Small Business.