45.3 Schedule SE

Schedule SE has an introductory “road map” designed to lead you to either the short or long version of Schedule SE. Once you pass through the road map, the preparation of either the short or long schedule for 2012 is not difficult. On both schedules, you reduce your net profit by .9235 to get your net earnings from self-employment. In other words, only 92.35% of the net earnings is subject to self-employment tax. The .9235 adjustment is the equivalent of a 7.65% reduction to net earnings, which, along with the income tax deduction for the employer equivalent portion of self-employment tax on Line 27 of Form 1040, attempts to place self-employed individuals on the same level as employees subject to FICA taxes.

Law Alert

2% Reduction

For 2012, the self-employment tax rate reflects a reduction of two percentage points in the employee share of Social Security taxes.

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The .9235 adjustment is made on Line 4 of either the short or long Schedule SE. After the .9235 adjustment is made, net earnings are subject to the 10.4% and 2.9% rates, assuming the resulting net earnings are $400 or more. For 2012, the 10.4% Social Security rate applies to the first $110,100 of net earnings and the 2.9% Medicare rate applies to all of the net earnings.

Special computation for deduction for self-employment tax.

The employer equivalent portion of the tax is deductible as an adjustment to gross income. In the past, this meant that 50% of the self-employment tax was entered on Line 27 of Form 1040. However, because the employee share of the Social Security tax is 2 percentage points lower than the employer share in 2012, a special computation is necessary to figure the 2012 deduction. If the self-employment tax is $14,643.30 or less, multiply it by 57.51% to find the deduction amount. If the self-employment tax is more than $14,643.30, multiply the tax by 50% and add $1,100 to the result to get your deduction.

Filing Tip

Deductible Part of Self-Employment Tax

After you figure your self-employment tax on Schedule SE, you figure the “employer-equivalent” portion of the tax, which you claim as an above-the line deduction on Line 27 of Form 1040. Before 2011 the deduction was 50% of the tax, but for 2011 and 2012 the percentage is larger to provide a deduction equivalent to what it would be without the 2% reduction in the rate for the employee share of Social Security taxes.

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Worksheet—Short Schedule SE