Self-employed sole proprietors usually must file an additional tax form to report their Social Security tax and Medicare tax. Because there is no matching contribution from an employer, self-employed persons are required to pay a higher rate on Social Security tax and Medicare tax than employed persons. To do so, sole proprietors must file IRS Schedule SE along with their Form 1040.

Company employees generally pay a Social Security tax rate of 6.2 percent, and their employer pays an equal amount. Most employees also pay a Medicare tax rate of 1.45 percent, with their employer matching the contribution. Self-employed persons, on the other hand, typically pay the full amount themselves with a combined rate for Social Security and Medicare of 15.3 percent.

The Social Security tax and Medicare tax imposed on a self-employed person are collectively referred to as self-employment tax. If you are a sole proprietor, use Schedule SE to report your self-employment tax after you have calculated the net profit from your business activity.

Income calculation on Schedule C

IRS Schedule C is the tax form used to determine the profit or loss from your sole proprietorship. Schedule C summarizes the income and expenses of your business. The net profit calculated on Schedule C is entered directly on Form 1040 as taxable income. The same amount is also used as the starting point for the completion of Schedule SE.

Self-employment tax calculation on Schedule SE

Schedule SE is designed to account for special situations that may affect the calculation of self-employment tax. If you also receive wages from an employer, the completion of Schedule SE prevents an overpayment of Social Security tax and Medicare tax. After your self-employment tax is calculated on Schedule SE, the amount is entered on Form 1040 as an amount owed.

Adjustment for self-employment tax on Form 1040

A unique aspect of Schedule SE is that it also results in a type of tax deduction. One-half of your self-employment tax is entered on Form 1040 as an adjustment. The adjustment effectively reduces your amount of income subject to regular income tax. Because of the adjustment, you must calculate self-employment tax before you are able to see exactly how the adjustment affects your income tax return.

Most sole proprietors prefer to estimate their self-employment tax in advance. The quarterly prepayment of self-employment tax reduces the amount due at the time of tax preparation. Contact an accountant for more advice on small business tax preparation.

Contact a company like The Callen Accounting Group, PLLC for more information.