Module 14: Self-Employment Income and the Self-Employment Tax
One to two hours
- Family and Consumer Sciences
- History/Social Studies
To help students understand self-employment income and the self-employment tax
Students will be able to
- distinguish between an employee and an independent contractor.
- explain how to compute and report self-employment profit.
- explain how to compute and report the self-employment tax.
A business is a continuous, regular activity that has income or profit as its primary purpose. Independent contractors are self-employed. Self-employed workers control the methods and means of performing services for others. In contrast, employers direct or control the work of their employees. Self-employment income may be reported to the independent contractor on Form 1099-MISC. Self-employment profit is self-employment income minus self-employment expenses when self-employment income is greater than self-employment expenses. Self-employment loss is self-employment income minus self-employment expenses when self-employment income is less than self-employment expenses. For a business owned by just one person, self-employment income, expenses, and profit or loss are reported on Schedule C, Profit or Loss From Business or Schedule C-EZ, Net Profit from Business. The self-employment tax is similar to Social Security tax and Medicare taxes. The self-employment tax rate in 2014 is 15.3 percent of self-employment profit (12.4 percent for Social Security and 2.9 percent for Medicare). The self-employment tax increases the total tax. An adjustment to income of one-half of a taxpayer's self-employment tax decreases the income that is subject to income tax.
A continuous and regular activity that has income or profit as its primary purpose.
Works for an employer. Employers can control when, where, and how the employee performs the work.
Performs services for others. The recipients of the services do not control the means or methods the independent contractor uses to accomplish the work. The recipients do control the results of the work; they decide whether the work is acceptable. Independent contractors are self-employed.
Used to provide medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of workers and retired workers are eligible to receive Medicare benefits upon reaching age 65.
Self-employment income minus self-employment expenses when self-employment income is less than self-employment expenses.
Self-employment income minus self-employment expenses when self-employment income is greater than self-employment expenses.
It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. The self-employment tax rate is 15.3 percent of self-employment profit. The self-employment tax is calculated on Schedule SE, Self-Employment Tax. The self-employment tax is reported on Form 1040, U.S. Individual Income Tax Return.
Social Security tax
Provides benefits for retired workers and their dependents as well as for the disabled and their dependents. Also known as the "Federal Insurance Contributions Act" (FICA) tax.
Hand out Fact Sheet-Self-Employment Income and the Self-Employment Tax. Use the following questions to prompt students to share their knowledge about self-employed workers:
- Provide an example of a self-employed worker. (Self-employed workers own their own businesses, such as restaurants, auto repair shops, personal training services, cleaning services, and professional services, such as doctors, attorneys, and accountants.)
- How does an employee differ from a self-employed person? (An employee reports to and is controlled by the employer. A self-employed person is his or her own boss.)
- Employees pay Social Security and Medicare taxes. Do you think self-employed workers pay similar taxes? (Self-employed workers pay the self-employment tax on the self-employment profit. Self-employment tax is similar to Social Security and Medicare taxes.)
Note: Refer students who may want to work independently on this module to Student Lesson-Self-Employment Income and the Self-Employment Tax.
Direct students to Tax Tutorial-Self-Employment Income and the Self-Employment Tax, and explain that this tax tutorial focuses on workers who own their own businesses. Tell students that they will learn the difference between employees and self-employed workers. They will learn how to identify and report self-employment income, expenses, and profit. They also will learn how to report the self-employment tax. Inform students that they will have an opportunity to look at tax forms associated with self-employed workers.
Direct students to Simulation 14A-Using 1099-INT to Complete Schedule C, Schedule SE and Simulation 14B-Using 1099-MISC to Complete Schedule C, Schedule SE, and Form 1040 Explain to students that they will use the information from Form 1099-MISC and other sources to complete Form 1040 for Rita Bentley, a teenager who has her own pet care business.
After students have completed the Tax Tutorial-Self-Employment Income and the Self-Employment Tax, Simulation 14A-Using 1099-INT to Complete Schedule C, Schedule SE, and Form 1040, and Simulation 14B-Using 1099-MISC to Complete Schedule C, ask whether they have questions about self-employed workers and how they report their income, expenses, and profit. Also ask students whether they have any questions about the self-employment tax. To ensure that they understand the material, ask the following questions:
- What is the difference between an employee and a self-employed individual? (Employers direct or control the work of employees. Self-employed workers are their own bosses; they control their own work.)
- What tax form is used to report self-employment income, expenses, and profit or loss? (Schedule C, Profit or Loss From Business or Schedule C-EZ, Net Profit from Business)
- What is the self-employment tax rate? (The self-employment tax rate is 15.3 percent.)
As a final review, summarize the major lesson points. Remind students that self-employment profit increases income subject to tax, and self-employment loss reduces income subject to tax. Also, the self-employment tax, which is similar to the Social Security tax and the Medicare tax, increases the total tax. When students are comfortable with the material, have them complete Assessment-Self-Employment Income and the Self-Employment Tax..
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