Many clients will ask their tax attorney and business attorney, what is a Schedule SE and why do I need to file a Schedule SE? The article below has been drafted by a Denver tax attorney at The McGuire Law Firm to provide background on, and explain a Schedule SE.
Schedule SE is used to calculate self employment tax and is titled just that. When a small business owner who is operating as a sole proprietor completes a Schedule C, the net profit from the Schedule C is transferred to the Schedule SE to calculate the self employment tax. Additionally, income from a partnership on Form K-1 is stated on a Schedule SE to calculate the self employment tax.
Self employment tax is the social security tax and Medicare tax. When an individual is working for an employer, the employer pays half of the social security and Medicare tax, which is known as the employer matching portion, and the employee pays half of the social security and Medicare tax, which is known as the employee matching portion. Thus, when you are an employee, only half of the self employment tax is deducted from your paycheck. Therefore, when an individual starts a business and is operating a sole proprietorship, they are often shocked at the amount of tax that is due on their net earnings that first year, or the first year in which they have earned a decent net profit because paying the total amount of the self employment tax can be a large tax burden, especially when considering that the self employment tax is in addition to the federal income tax and of course state income tax (in most states).
The taxpayer is allowed to deduct half of the self employment tax in arriving at their adjusted gross income and although a benefit and helpful, I am sure each self employed taxpayer would rather not have to pay half of the tax as opposed to lowering their taxable income by half of the tax. The social security portion of the self employment tax does max out at a certain amount of income whereas the Medicare tax does not. The social security portion is the larger portion of the self employment tax, so this can be helpful to taxpayers, but the max out generally occurs at a relatively high income when compared to the median income in the United States.
A Denver small business attorney or tax attorney at The McGuire Law Firm would welcome the opportunity to discuss tax and business issues with you. There are entities that would allow you to lower the amount of self employment tax you pay.