Schedule SE: What Independent Contractors Need to Know

If you’re a freelancer, independent contractor, small business owner, or expat subject to self employment tax, you’re probably familiar with the freedom that comes with being your own boss. But with that freedom comes a less glamorous reality: the responsibility to pay self-employment taxes. Unlike traditional employees, who share the cost of Social Security and Medicare taxes with their employers, self-employed individuals are responsible for the whole amount. And to ensure the accurate calculation and payment of this annual self-employment tax, IRS Schedule SE is a key filing for those who run a small business both in the US and abroad.

Schedule SE,  which calculates and reports Self-Employment Tax, might not be the most exciting IRS form, but it plays a critical role in ensuring you’re paying into the Social Security and Medicare programs in the US. For small business owners, gig workers, and entrepreneurs expats earning income abroad, understanding and filing this form is key to staying compliant and avoiding costly mistakes.

In this guide, we’ll walk you through everything you need to know about Schedule SE—from who needs to file it to how to calculate your self-employment tax. Whether you’re a first-time freelancer or an expat with years of experience, you’ll leave with a clear roadmap for filing confidently.

What Is Schedule SE?

At its core, Schedule SE is an IRS form that helps self-employed individuals calculate and report their self-employment tax. This tax is essentially your contribution to Social Security and Medicare—US programs that are funded by payroll taxes for traditional employees.

As a self-employed person, you’re both the employer and the employee, which means you’re on the hook for 15.3% of your net earnings:

• 12.4% for Social Security: Covers retirement, disability, and survivor benefits. This applies to net earnings up to the Social Security wage base limit ($160,200 for 2023; subject to annual adjustments).
• 2.9% for Medicare: Applies to all net earnings with no income limit. Note, there is an additional Medicare tax of 0.9% on earnings above certain thresholds.

Think of these taxes as a way to ensure that you’re eligible for future benefits and coverage while staying compliant with U.S. tax laws.

Who Needs to File Schedule SE?

Not everyone is required to file Schedule SE with their annual Form 1040 filing, but if you meet the following criteria, it’s a must:

You’re Self-Employed and Earned $400 or More

If you earned at least $400 in net self-employment income during the tax year, you’re required to file Schedule SE. This includes income from:

• Freelancing
• Side gigs
• Consulting
• Running a small business or sole proprietorship
• Other self-employment activities

You’re a Partner in a Business

Partners in a partnership who receive self-employment income, such as guaranteed payments or distributive shares of partnership income, must also file Schedule SE.

You’re a U.S. Expat With Self-Employment Income

Even if you’re living abroad, the IRS requires U.S. citizens and residents to pay self-employment tax on their worldwide self-employment income, unless a Totalization Agreement with the country you reside in applies.  (more on this later).

You Earned Income From Farming or Agriculture

Farmers and ranchers report their earnings using Schedule F, but they must also file Schedule SE to calculate self-employment tax on their net farming income. Some farm-related income, such as crop insurance proceeds or cooperative distributions, may also be subject to self-employment tax.

Breaking Down Schedule SE: How to Calculate Self-Employment Tax

Filing Schedule SE might sound intimidating, but it’s a straightforward process once you understand the basics. Here’s how to tackle it:

Step 1: Calculate Your Net Earnings

Before you can complete Schedule SE, you’ll need to determine your net earnings from self-employment. This is typically calculated on Schedule C (for sole proprietors and most freelancers) or Schedule F (for farmers). Your net earnings refer to your total income minus ordinary and necessary tax deductions, such as office supplies, marketing costs, or legal expenses.

Step 2: Apply the 92.35% Adjustment

The IRS calculates self-employment tax on 92.35% of your net earnings, rather than the full amount. This adjustment exists because self-employed individuals are effectively both the employer and employee. Because traditional employees only pay half of the Social Security and Medicare taxes, with their employers covering the other half, the adjustment accounts for this “employer-equivalent” portion to ensure fairness in the overall tax calculation.

Step 3: Calculate the Tax Due

Now that you’ve determined your taxable self-employment income amount, it’s time to calculate your self-employment tax:

• Social Security Tax (12.4%): Applies to the first $160,200 of your earnings for 2023.
• Medicare Tax (2.9%): Applies to all earnings, with no income limit.

Example: Let’s say you earned $50,000 in net self-employment income. Here’s how your tax breaks down:

• Self-employment taxable income: $50,000 x 92.35% = $46,175
• Social Security tax: $46,175 x 12.4% = $5,730
• Medicare tax: $46,175 x 2.9% = $1,340
• Total self-employment tax: $5,730 + $1,340 = $7,070

Step 4: Claim Your Deduction

Here’s a bit of relief for self-employed individuals: you can deduct 50% of your self-employment tax as an adjustment to your taxable income. This deduction is not a credit, so it won’t reduce your self-employment tax itself, but it does lower your taxable income on Form 1040, which can reduce the amount of federal income tax you owe.

Key Points to Understand:

• What’s deductible? Only the “employer-equivalent” portion of your self-employment tax (50% of the total) is deductible. For example, if your total self-employment tax is $10,000, you can deduct $5,000 as an adjustment to income.
• Where to claim it? The deduction appears on Schedule 1 of your Form 1040, under “Adjustments to Income.”
• No need to itemize: This deduction is available whether you take the standard deduction or itemize deductions.

Special Considerations for U.S. Expats

If you’re a U.S. expat, navigating self-employment taxes can feel more complicated due to overlapping tax obligations in both the U.S. and your host country. Here’s a breakdown of key considerations:

Self-Employment Tax Still Applies

Even if you qualify for the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC) to reduce your income tax, these do not exempt you from self-employment tax. That means if you’re running a business or freelancing abroad and paying no income tax, you may still owe U.S. self-employment tax.

Totalization Agreements Can Help

The U.S. has signed Totalization Agreements with more than 25 countries to prevent double taxation on Social Security contributions. If you’re already paying into a foreign Social Security system, you may be exempt from U.S. self-employment tax. 

These agreements are designed to determine which country’s Social Security system you’re required to contribute to. Then, they will exempt you from U.S. self-employment tax if you’re already paying into the foreign Social Security system in the host country.

To qualify for the exemption, you must:

• Reside in a country with a Totalization Agreement (e.g., Germany, Canada, the UK, Australia).
• Pay into that country’s Social Security system.

Obtain a Certificate of Coverage from your host country’s Social Security authority, which serves as proof of contribution and exemption.

Example: Katherine is a freelance consultant living in France, a country with a Totalization Agreement with the U.S. Since she’s contributing to the French social security system, she can file for an exemption from U.S. self-employment tax by obtaining a Certificate of Coverage from the French social security authority.

To claim an exemption from paying self-employment tax and filing IRS Schedule SE you must attach a statement to your individual income tax return outlining your foreign coverage as a reason for not reporting self-employment tax on your Form 1040. You should also maintain a copy of your Certificate of Coverage in your records, should the IRS request additional information.

Filing Schedule SE: Step-by-Step

Filing Schedule SE may seem complex, but breaking it down into manageable steps can simplify the process. Here’s how to file it alongside your tax return:

1. Complete Schedule C (or equivalent)
   Start by filling out Schedule C (Profit or Loss from Business) to calculate your net earnings from self-employment. For certain types of income, like farming, you might need Schedule F instead.
2. Fill Out Schedule SE
   • Enter Net Earnings: Transfer the net earnings figure from Schedule C (or equivalent) to Schedule SE, Line 2.
   • Apply the 92.35% Adjustment: Multiply your net earnings by 92.35% to calculate your taxable self-employment income.
   • Calculate Self-Employment Taxes:
     1. Social Security Tax: Apply the 12.4% rate up to the Social Security wage base limit ($160,200 for 2023).
     2. Medicare Tax: Apply the 2.9% rate to your entire taxable income (no cap).
3. Report the Tax on Form 1040
   • Transfer the Total Tax: Enter the self-employment tax amount calculated on Schedule SE, Line 12 to Form 1040, Line 23 (2023).
   • Claim the Deduction: Report 50% of your self-employment tax as an adjustment to income on Schedule 1 (Additional Income and Adjustments), Line 15 (2023).
4. File Electronically or by Mail
   Submit your completed Form 1040, Schedule SE, and any supporting schedules or forms to the IRS. If you’re an expat, you automatically qualify for a two-month extension, making your filing deadline June 15. However, any taxes owed are still due by April 15 to avoid late payment penalties and interest.

Common Mistakes to Avoid

Even seasoned freelancers and small business owners make mistakes when filing Schedule SE. Here are some common pitfalls and how to avoid them:

• Miscalculating Net Earnings
  Ensure that all income and business expenses are accurately reported and align with what is transferred to Schedule SE, Line 2. Small discrepancies can lead to mismatched numbers and potential IRS inquiries.
• Overlooking the 92.35% Adjustment
  Always apply this adjustment to reflect the portion of income subject to self-employment tax. It accounts for the employer-side deduction allowed for employees and ensures you don’t overpay.
• Ignoring Totalization Agreements
  Research whether your host country has a Totalization Agreement with the U.S. If so, include a statement with your return explaining why you’re exempt from self-employment tax. Obtain a Certificate of Coverage from the relevant authority in your host country to support your claim.
• Failing to Claim the Deduction
  This deduction is a valuable adjustment to your taxable income and can significantly lower your tax liability. Double-check Schedule 1, Line 15 (2023) to ensure it’s included.

Stay Compliant and Confident

Filing Schedule SE might not be the most exciting part of self-employment, but it’s a crucial step in staying compliant with U.S. tax laws—and investing in your future Social Security and Medicare benefits. Whether you’re a freelancer, small business owner, or expat, understanding how to calculate and file your self-employment tax will save you headaches and help you avoid costly mistakes.