If I'm paying self-employment tax on Schedule 4 (Other Taxes), why is my self-employment income also included in my taxable income? Aren't I being double taxed?


No - self-employment tax is to cover the 15% FICA and medicare withholdings that an employer would normally cover half of (they would pay 7.6% and withhold 7.6% from your paycheck).

You would pay income tax regardless of whether you were a W-2 employee or an independent contractor, so you are not double-taxed from an income tax standpoint (they are two different "taxes" on the same income).

Note that you also deduct half of your self-employment tax from your gross income since this portion would normally be paid by employers and not counted as a "benefit" to you.


Meta: D beat me, but I'd already typed most of this so I'll let it stand.

Everybody in the US pays both Social Security and Medicare tax on essentially all earned income (SS only up to an annual cap, currently about $130k), and income tax on total income less allowed exemptions and deductions and less credits.

If you are a W-2 employee, the employer nominally pays half of SS/Medicare (together often called FICA) and deducts the rest from your pay, and sends both directly to the government. Although the employer nominally pays half, the employer considers it part of compensation and almost always reduces the amount they (are willing to) pay you dollar for dollar, so in economistese the 'tax burden' still falls on you. FICA rates are simple and exact, so you don't have to fill out any paperwork and unless you look carefully at your pay stubs and W-2 (or get a statement of your account from SSA) you aren't even aware of it.

The employer also withholds for income tax, but this is only an estimate, because your actual tax can be affected by many things the employer doesn't or can't know. At the end of the year you must (if over the filing threshold) prepare and file a 1040 on which you compute your actual tax, subtract the withholding, and determine if you are overpaid (and get a refund) or underpaid (and must pay the rest directly).

For self-employed, you pay the equivalent of both halves of SS/Medicare as self-employment tax (SECA instead of FICA) and fill out Schedule SE (and others like C, E, F) to do so. You also compute and pay income tax in much the same fashion as an employee, except that in the absence of withholding you are (were) responsible for sending estimated payments every 'quarter' (actually April, June, Sept., Jan.) -- and if you didn't, you are subject to what is called a penalty but actually functions as interest at the Treasury short-term rate. Notice that you deduct half of your SE tax from income subject to income tax (Schedule 1 line 27 on the newly-reorganized form) -- this matches the way an employer excludes their half of FICA from your nominal wages reported on W-2. (Both employed and self-employed can exclude health insurance for income tax, but self-employed DON'T get to exclude it for SECA tax the way employer-paid health insurance is excluded from FICA.)

  • Where and how is the penalty computed in? I ask because 2018 was my first year self-employed, and because I don't have a previous year's income to estimate quarterly payments (according to the tax law, confirmed by a call to the IRS) I don't have to do quarterly payments and am not subject to the penalty, the first year. – BrettA Mar 29 '19 at 14:48
  • @BrettA: You need to look at the IRS "Safe Harbor" rules. Simplistically (it's a bit more complicated), if your total withholding plus estimated tax payments equals the tax you owed last year, or the tax you will owe this year, you're ok. – jamesqf Mar 29 '19 at 19:01
  • If you had no tax for 2017 -- you weren't self-employed or employed or had other income like investments or fellowships above the threshold -- then yes you have a safe harbor from penalty even with zero payments in 2018. The standard amount for estimated payments is 90% of this year's tax (less for farmers and fishers), but if that's too hard to predict 100% of last year's tax (110% for high incomes) is an acceptable alernative. See 1040 instructions line 23, and as referenced form 2210 and its instructions (on the website) -- although you can let the IRS compute it for you. – dave_thompson_085 Mar 31 '19 at 20:42

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