How to File Schedule SE for the 2020 Tax Year
This guide provides a procedural overview of the 2020 Schedule SE, clarifying the tax calculation, the available deduction, and year-specific adjustments.
Schedule SE, “Self-Employment Tax,” is the form used to calculate the Social Security and Medicare taxes owed by individuals who work for themselves. These taxes are similar to the FICA taxes withheld from an employee’s paycheck, but self-employed individuals pay both the employee and employer portions. The Social Security Administration uses the information on this schedule to determine an individual’s future benefits. For the 2020 tax year, this form also included special provisions related to the COVID-19 pandemic.
Determining if You Need to File Schedule SE
For the 2020 tax year, an individual with net earnings from self-employment of $400 or more was required to file Schedule SE. This income could come from work as an independent contractor, a sole proprietor, or a member of a partnership. These earnings are calculated on other forms, such as Schedule C or Schedule F, and then transferred to Schedule SE.
A separate threshold applied to church employee income. If an individual earned $108.28 or more as a church employee, they were also required to file Schedule SE. This rule ensures that employees of churches and qualified church-controlled organizations contribute to Social Security and Medicare.
Even if a business activity resulted in a small profit or a loss, filing could be beneficial. The instructions for Schedule SE outlined optional methods that allowed individuals to report earnings to gain credits toward Social Security coverage in low-income years.
Information Required to Complete Schedule SE
To complete Schedule SE, you needed your total net profit or loss from all self-employment activities. This amount comes from the net profit on Schedule C or Schedule F. For partners, their share of partnership income subject to self-employment tax, as reported in box 14, code A, of their Schedule K-1 (Form 1065), was also required.
You also needed the total amount of wages and tips received as an employee, found on any Form W-2. W-2 wages were an important input because the Social Security portion of the self-employment tax had an income limit. This figure determined if that limit had already been reached through regular employment, which would reduce the amount of self-employment tax owed.
Calculating the Self-Employment Tax
The first step in calculating the tax was to determine the net earnings subject to tax. This was done by multiplying the total net profit from self-employment by 92.35%. This adjustment accounts for the fact that employees do not pay FICA tax on the portion of their wages that their employer pays for FICA.
Once the taxable earnings were established, the tax was calculated in two parts. The Social Security tax rate was 12.4%, which applied to the first $137,700 of combined wages, tips, and net self-employment earnings. The Medicare tax was a flat 2.9% on all net self-employment earnings with no income cap.
If an individual also had W-2 wages, those wages counted first toward the $137,700 Social Security limit. If W-2 wages met or exceeded this limit, the person would only owe the 2.9% Medicare tax on their self-employment income. The form’s instructions guided taxpayers through this calculation to ensure the Social Security wage base was not taxed twice.
Claiming the Self-Employment Tax Deduction
Taxpayers can deduct one-half of their total self-employment tax liability, which helps equalize the tax treatment between self-employed individuals and employees. This deduction represents the equivalent of the employer’s share of FICA taxes. After calculating the total self-employment tax on Schedule SE, the taxpayer takes one-half of that amount and reports it as an adjustment to income on Schedule 1 (Form 1040). This adjustment directly reduces the taxpayer’s adjusted gross income (AGI), lowering their overall income tax liability.
Special Considerations for the 2020 Tax Year
The 2020 tax year was unique due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act allowed taxpayers to defer paying 50% of the Social Security tax component of their self-employment tax liability incurred between March 27, 2020, and December 31, 2020. This deferral was not a forgiveness of the tax but a delay in the payment due dates.
The deferred amount was to be repaid in two equal installments, with the first half due by the end of 2021 and the second half due by the end of 2022. The 2020 Schedule SE included a new Part III for calculating the maximum deferral amount. Taxpayers had to make a reasonable allocation of their annual income to the period after March 26 to determine the eligible amount for deferral.