FAQs About Self-Employment Tax
Do you owe self-employment (SE) tax on non-wage income that you collect only occasionally or in a one-off circumstance? Some sources of income may not be subject to the dreaded SE tax. Here’s what you should know if you earn income from “irregular” sources.
What Is SE Tax?
SE tax is the way the U.S.Treasury Department collects Social Security and Medicare taxes on non-wage income from business-related activities. For 2019, the SE tax rate is 15.3% on the first $132,900 of net SE income. The rate has two components:
- 12.4% for the Social Security tax, and
- 2.9% for the Medicare tax.
Above the $132,900 threshold, the Social Security tax component goes away, but the 2.9% Medicare tax continues before rising to 3.8% at higher income levels. There’s no limit on the Medicare tax component.
Individuals who are regularly self-employed must include SE tax with their quarterly estimated federal income tax payments to avoid an interest charge penalty.
Important: The Social Security Administration recently announced that in 2020 the 15.3% maximum SE rate will apply to the first $137,700 of net SE income. That ceiling is up by 3.6% compared to 2019. Meanwhile, Social Security benefit payments will go up by only 1.6% next year.
Will You Owe It on Random Income?
SE tax applies only to individuals who engage in a trade or business. So, if you’re not regularly self-employed and you earn income from some random work, occurrence or one-off circumstance, you don’t owe SE tax — even if the income would be subject to SE tax if you were regularly self-employed in that activity.
You don’t owe SE tax unless the net income in question is from a trade or business. In the landmark Groetzinger case, the U.S. Supreme Court ruled that an activity must be conducted with “continuity and regularity” and with a “profit motive” to incur SE tax. Therefore, income earned from an isolated or sporadic activity isn’t generally subject to SE tax because the random activity doesn’t rise to the level of a trade or business.
The U.S. Tax Court reaffirmed this treatment in its 2016 Ryther decision. Here, the former owner of a steel company had income from sales of scrap metal that he had stockpiled over the years before his steel company was dissolved. The court opined that the income was excluded from net SE income. The scrap metal was neither inventory nor primarily held for sale to customers in the ordinary course of a trade or business. The taxpayer’s sales occurred only once or twice per month and only once per day. Therefore, the sales were too sporadic to constitute a trade or business, and the income wasn’t subject to SE tax.