Self Employed Contributions Act (SECA) - Explained
What is the Self Employed Contributions Act?
Written by Jason Gordon
Updated at August 2nd, 2023
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What are Payroll Taxes?
Payroll taxes consist of Medicare and Social Security taxes that are required to be withheld by an employer from an employee's compensation. Payroll taxes are authorized under the Federal Insurance Contributions Act or FICA.
The employer is also required to pay FICA taxes on the compensation of any employee.
Generally, an employer pays an amount approximately equal to the amount paid by the employee.
Together, the employer contribution and employee contribution make up the total payroll taxes.
What are Self Employment Taxes?
Self-Employment taxes are a combination of the employer and employee's FICA taxes (Social Security and Medicare).
What is the Self Employment Contributions Act?
The Self-Employment Contributions Act (SECA) of 1954 requires self-employed individuals to pay both or the combination of the employer and employee's FICA obligations.
Self Employment taxes apply to those who are self-employed in a sole proprietorship or partnership-taxed entity.
Generally, employees pay 1/2 of FICA taxes, and employers pay the other half. Because the employer and employee may be the same person, that individual is subject to the full amount of FICA tax.
In summary, self-employment taxes are the full amount of FICA taxes.
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How Much are Self Employment Taxes?
- Social Security Tax is charged at 6.2% for employers, and at an equal rate for employees. Paying taxes as a self employed person or business will invite a Social Security Tax of 12.4%. It is capped at $12,921.60 for a net income of $128,400 as a self employed entity.
- Medicare Tax rates for regular businesses and their employees is charged at 1.45%. Hence under SECA, it comes up to 2.9%. These are not capped.
- Total SECA Tax rate is now 15.3%. A self-employed individual earning a net income of $100,000 per annum will pay a FICA Tax of $15,300. Filing taxes as a couple incurs an additional 0.9% in Medicare taxes.
Social Security component of SECA Tax is eliminated when the income level reaches a capped threshold. There's no such exemption on Medicare taxes for any amount of net income earned.
The IRS allows this provision to self employed individuals, facilitating deduction of 7.65% tax as a business expense. This brings the net income on which SECA tax can be deducted to 92.35% of an individual or business's total net earnings. SECA tax isn't applicable on earnings of less than $400.