Do You Owe Self-Employment Tax?
Being self-employed can be advantageous from a tax perspective. An extensive list of deductible business expenses can offset the federal income tax due on amounts derived from a self-employed individual’s business activities. The list includes health insurance premiums and retirement plan contributions made by the business owner.
Note, however, that you can’t get off entirely scot-free. If you’re self-employed, you must pay self-employment (SE) tax on your taxable business income, the equivalent of FICA tax for employees. As a recent U.S. Tax Court case shows, you can’t avoid the tax simply by designating amounts as “other income” on your tax return (Clark v. Commissioner, TC Memo 2025-13, February 5, 2025).
Basic Income Tax Information
According to the Bureau of Labor Statistics, about 16.2 million people are currently self-employed, comprising more than 10% of the U.S. workforce. This includes approximately 6.6 million incorporated businesses and 9.6 million unincorporated businesses. Many workers participate in the “gig economy” that has taken root during the last decade.
Besides specific lifestyle changes, unincorporated self-employed people must meet different tax return obligations than employees. Notably, they must report all their business operation’s income and expenses on Schedule C, “Profit or Loss from Business (Sole Proprietorship).” This may include payments for goods or services rendered and deductions for costs like equipment and supplies.
Schedule C is coordinated with other aspects of their returns and various forms and schedules. For example, you may have to provide information relating to the business use of a vehicle, subject to deduction limits. Also, as a self-employed person, you can deduct health insurance paid for yourself, your spouse and qualified dependents plus retirement contributions to a qualified plan, like a 401(k), SEP or SIMPLE. These deductions are claimed “above the line” and reduce adjusted gross income for other tax purposes.
Coping with Self-Employment Tax
Unlike employees, self-employed individuals don’t pay the standard FICA tax, which consists of Social Security and Medicare taxes. The 6.2% Social Security tax applies to an annual wage base ($176,100 in 2025), and the 1.45% Medicare tax applies to all wages. The amounts are withheld from employee paychecks based on IRS-approved tables.
However, self-employed individuals are responsible for paying self-employment tax on their business income at double the FICA rates. In other words, the Social Security tax rate is 12.4% on the same base of $176,000, and the Medicare tax is 2.9% on all self-employment income.
Saving grace: You can deduct half of the self-employment tax paid above the line on Form 1040. Self-employment tax must be paid in four quarterly installments: April 15, June 15 and September 15 of the current year and January 15 of the following year. If the due date falls on a weekend or national holiday, it’s moved to the next business day.
Any business profit (or loss) is reported on Part I, Line 5 of Schedule C. On Line 6, you must include “other income” from sources such as bad debts you’ve recovered, interest from notes and accounts receivable, certain fuel credits, and other miscellaneous business income. Key point: This other income isn’t subject to self-employment tax. And that was the crux of the matter in the recent U.S. Tax Court case.
Facts of the Case
The taxpayer, a resident of Georgia, has been a freelance writer of movie reviews since 1995. In 2019, he received $8,250 from freelance movie review writing. In addition, the taxpayer buys and sells movie-related memorabilia. He sells the memorabilia on eBay, and the sale proceeds are paid to him through a PayPal account in his name. The taxpayer received $41,972 from selling movie-related memorabilia in 2019.
PayPal sent the IRS and the taxpayer a Form 1099-K reporting $41,972 as the gross amount of payment card/third-party transactions for 2019. No federal income tax was withheld.
The taxpayer prepared his 2019 federal income return with assistance from a tax preparation firm. He didn’t report any income he received from freelance movie review writing or selling movie-related memorabilia on Schedule C. Instead, he entered the income (totaling $50,222 — the $8,250 from freelance movie review writing and the $41,972 from selling movie-related memorabilia) as “other income” exempt from self-employment tax on Schedule C.
After claiming the standard deduction of $12,200 for a single filer in 2019, the taxpayer reported a taxable income of $38,022 and a tax liability of $4,369. Thereafter, the IRS assessed a deficiency based on failing to report $50,222 from movie reviews and memorabilia sale activities as subject to self-employment tax.
But the taxpayer objected. He said the refund he initially received from the IRS was a concession that his Schedule C entry was correct. Furthermore, he claimed that a document he’d received from the Social Security Administration (SSA) reflecting self-employment income of “0” proved his point, even though it was subsequently corrected. Eventually, the taxpayer proceeded to the U.S. Tax Court.
Not surprisingly, the court sided with the IRS. It held that the IRS hadn’t made any concession regarding other income. The SSA document resulted from the IRS having prematurely assessed the deficiency and additions to tax for the year at issue and then reversing that assessment. To add insult to injury, the Tax Court imposed an accuracy-related penalty to the amount owed. However, it commented that the taxpayer appeared “sincere” in his position.
Moral of the Story
If you’re self-employed and show a profit in the current tax year, you’ll likely owe self-employment tax for the year. Nevertheless, some taxable income may qualify as “other income” exempt from this tax liability. Obtain guidance from a tax professional for your situation.
Copyright 2025
This article appeared in Walz Group’s March 31, 2025 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.
