Knowing how to pay SECA tax, often called self-employment tax, is a rite of passage for everyone who decides to strike out on their own and work for themselves. One of the realities of being your own boss is that you are now fully responsible for some of the taxes companies usually split with employees by automatically taking them out of their paychecks.
Self-employment tax is made up of Social Security and Medicare taxes
SECA tax pays for Social Security benefits and Medicare benefits
Self-employed individuals are responsible for 100% of SECA tax
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What is SECA?
SECA is basically the self-employed version of FICA taxes, which came about way back in 1935, when the federal government passed the Federal Insurance Contribution Act. Legislators decided that a social program to benefit all working Americans in their retirement was the right thing to do, and so Social Security was born and FICA taxes became the way to fund it.
In 1954, the SECA meaning Self Employed Contributions Act was passed, so that retired workers can receive Social Security benefits, and younger workers can help pay into the Social Security fund. In 1965, Medicare, a healthcare program using Social Security benefits, was created for older adults a few years after President Kennedy introduced it.
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How is SECA tax broken down?
Let's start with the FICA tax, so you can see what the employer/employee looks like first. The Social Security and Medicare bill totals 15.3% of all net earnings for every worker. Companies with employees pay half of that, 7.65%, and their employees pay the other 7.65%.
According to SECA, self-employed individuals are required to pay the entire 15.3% of FICA taxes. This total is also called self-employment tax, and it has two parts: Social Security tax and Medicare tax.
12.4% of your SECA tax goes toward Social Security, but there is a limit to that. The amount changes every year, but after a certain amount of income, you no longer have to pay Social Security tax. In the 2021 tax year, the limit was $142,800. Anything over that amount won't be taxed.
If you made $160,000 in net earnings in 2021 from your online business selling handmade gifts, for example, you will owe 12.4% tax on the first $142,800 of it. But you wouldn't be required to pay any Social Security tax on the last $17,400.
The second 2.9% of the FICA taxes that self-employed people owe goes to fund Medicare, but there is no limit to this part. You will need to pay 2.9% on the full $160,000 you earned with your online business.
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2013 change to SECA tax
When the 2013 Affordable Care Act was passed, an additional tax for Medicare was added for income over a certain amount. The 0.9% surtax gets added for any single individual and head of household making more than $200,000.
The threshold is $250,000 for married couples filing jointly and $125,000 for married couples filing separately.
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Who needs to pay SECA tax?
If your net earnings from your self-employment work total $400 or more, you're on the hook for paying SECA tax. That goes for freelancers, self-employed individuals who own a business and independent contractors.
If you work for a company that gives you a regular paycheck, the company should be automatically withholding this tax for you, and you won't need to worry about paying them.
In some rare situations, you might not expect to pay SECA tax. For example, if you're a citizen of the US and you work for a foreign government, you're still responsible for paying it.
Also, members of the clergy are considered by the IRS to be self-employed, so churches do not pay FICA taxes, as they do for other people that a church employs. They are required to pay self-employment taxes on their salary and housing allowance because, as a type of business, churches can't pay SECA tax for pastors.
Some churches offer ministers and pastors a SECA allowance as compensation for their services. The SECA allowance covers the employer’s portion, in this case, the church's portion of FICA taxes. This is still considered taxable income that clergy members must pay income tax on.
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California self employment tax
Tax brackets for state income tax can vary from state to state, so the California tax rate for self employed is the same as in any other state in the union. It's also important not to confuse this with federal income tax, which is separate from self-employment tax.
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