Self-Employment Contributions Act (SECA)

Self-Employment Contributions Act (SECA)

The Self-Employment Contributions Act (SECA) refers to a U.S. federal law that requires self-employed individuals to pay taxes equivalent to the combined employee and employer contributions to Social Security and Medicare. Unlike employees who share their Social Security and Medicare taxes with their employers, self-employed individuals are responsible for the full amount.

Detailed Definition

Under SECA, self-employed persons must calculate their net earnings from self-employment. The current self-employment tax rate is 15.3%, which consists of 12.4% for Social Security and 2.9% for Medicare. Additionally, there is an additional 0.9% Medicare tax on wages and self-employment income above a certain threshold.

Examples

1. Freelancer Example:

   • Jane Doe is a freelance graphic designer. Over the fiscal year, she earns $80,000 in gross income. After deducting business expenses equating to $20,000, her net earnings from self-employment are $60,000. Jane must pay SECA taxes on her $60,000 net earnings, contributing both the employee and employer portions for Social Security and Medicare.

2. Small Business Owner Example:

   • John Smith runs a successful small business with net earnings of $150,000 for the year. His SECA tax rate is 15.3% up to the Social Security wage base limit, and 2.9% Medicare tax on income exceeding the limit. Additionally, he may owe the 0.9% additional Medicare tax on income exceeding the threshold.

Frequently Asked Questions (FAQs)

Q1: What is the current SECA tax rate?

• A1: The current SECA tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.

Q2: Is there an income limit for SECA taxes?

• A2: Yes, Social Security taxes apply to earnings up to the Social Security wage base limit, which can change annually. The Medicare portion, including the additional 0.9% tax, applies to all net earnings and wages above a certain threshold.

Q3: Can I deduct SECA taxes on my income tax return?

• A3: Yes, you can deduct the employer-equivalent portion of your SECA tax when calculating your adjusted gross income on your tax return.

Q4: Do I need to pay SECA taxes if I have a regular job besides my self-employment?

• A4: Yes, you must pay SECA taxes on your net earnings from self-employment in addition to any Social Security and Medicare taxes withheld by your employer from your regular job.

Q5: How do I report and pay SECA taxes?

• A5: You report SECA taxes on Schedule SE (Form 1040) and pay them along with your annual income tax return.

Related Terms with Definitions

• FICA (Federal Insurance Contributions Act): A law that mandates a payroll tax to fund Social Security and Medicare, shared between employers and employees.
• Medicare Tax: A tax that funds Medicare, the federal health insurance program for people aged 65 and older, and others with specific conditions.
• Net Earnings: The gross income from being self-employed after deducting allowable business expenses.

Online References

• IRS: Self-Employment Tax (Social Security and Medicare Taxes)
• Social Security Administration: Self-Employed Individuals
• Medicare.gov: Medicare Coverage for the Self-Employed

Suggested Books for Further Studies

• “Self-Employed Tax Solutions” by June Walker
• “The Small Business Tax Guide” by Mathew Grubb
• “The 2022 Social Security Manual” by Michael Townsend

Fundamentals of SECA: Taxation Basics Quiz

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