Long Method
You must use the long method, however, if you are a minister, church employee, have unreported tips, have wages or other income exceeding the Social Security maximum wage limit of $90,000, or you have self-employment income below $400 but you are choosing to use one of the optional methods.The long method is figured on Schedule SE (PDF), page 2. The long method seems complicated, but is really just another step-by-step form. Here's how to fill it out.
If you only have income as a church employee, enter "-0-" (zero) on line 4c and go directly to line 5a. This does not apply if you are a minister.
Line 1: Report your net profit from farming (Schedule F) and farming partnerships (Schedule K-1, box 14, code A).
Line 2: Report your net profit from business (Schedule C), and from business partnerships (Schedule K-1, box 14, code A). Line 2 is also where ministers report their wages (W-2).
Ministers, clergy, and members of religious orders, must increase their wages on Line 2. They must add together the amounts received for:
- Wages,
- Housing allowance, and
- Value of meals and lodging provided at no cost.
Although the housing allowance is subject to self-employment taxes, ministers can take an itemized deduction for real estate taxes, mortgage interest, cash donated back to their church, and job-related expenses such as mileage. Itemized deductions are reported on Schedule A.
Line 3: Using a calculator, add together lines 1 and 2.
Line 4a: Using a calculator, multiply the amount on Line 3 by 0.9235. If Line 3 is zero or a negative number, do not multiply, and just enter the same amount from Line 3 on Line 4a.
Line 4b: If you chose to use one of the optional methods (lines 14-17), add together line 15 and line 17, and put the total on line 4b.
Line 4c: Add lines 4a and 4b. If the total is less than $400, then you do not owe any self-employment tax.
Line 5a: Enter the amount of church employee income (W-2).
Line 5b: Multiply line 5a by 0.9235. If the result is less than $100, enter "-0-" (zero).
Line 6: Add together lines 4c and 5b. This is your net earnings for the self-employment tax.
Line 7: This line is already filled out with $87,900. This is the maximum amount of income subject to the Social Security Tax.
Line 8a: Enter your other wage income (wages from W-2 box 3, tips from W-2 box 7, and tier 1 railroad retirement benefits). If the total figure is over $90,000, skip directly to line 11.
Line 8b: Enter any unreported tips from Form 4137 line 9.
Line 8c: Add together lines 8a and 8b.
Line 9: Using a calculator, enter the amount from line 7, and subtract the amount on line 8c. If the result is zero or a negative number, enter "-0-" (zero) on lines 9 and 10, and skip to line 11.
Line 10: Compare line 6 and line 9. Take whichever amount is smaller, and multiply that amount by 0.124. (This is the Social Security Tax.)
Line 11: Multiply the amount on line 6 by 0.029. (This is the Medicare Tax).
Line 12: Add together the amounts from lines 10 and 11. (This is your total Self-Employment Tax.) Enter this amount on Form 1040 line 57.
Line 13: Divide the amount on line 12 by 2. (This is your Self-Employment Tax deduction.) Enter this amount on Form 1040 line 30.
Optional Methods
If your farm income or business income was less than certain amounts, you may qualify for a reduced Self-Employment Tax. Using the optional method may result in higher Earned Income Credit and Additional Child Tax Credit. You should calculate your tax credits using both the regular method and the optional method to see which gives you a bigger advantage. Instructions for the Optional Methods are found in Instructions for Schedule SE (PDF), pages 3 to 4.
Adjustments
Net income subject to the self-employment tax is first reduced by 7.65%. This reflects the fact that employers can reduce their net income by the amount of payroll taxes, in other words, their 7.65% portion of the Social Security and Medicare tax. Thus, the self-employed person gets to reduce net income by this 7.65% amount before figuring the self-employment tax. Additionally, you take an adjustment on Form 1040 Line 30 for one-half of the self-employment tax. Together these two adjustments place an independent contractor in roughly the same position as a wage-earner.
