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Question from a web visitor: why is the deduction for 1/2 of self-employment tax taken on the front side of the 1040 and not on the proprietorship’s Schedule C?

Setup

Let’s define a few terms and set things up first.

A sole proprietor reports their business activity on a Schedule C, which is attached to the proprietor’s Form 1040. The net income from the proprietorship is reported on Line 12 of the 1040.

The proprietor owes self-employment tax on the proprietorship’s net income. As discussed before, the formula for self-employment tax is: net income from Schedule C x .9235 x .153

Self-employment tax goes on Line 57 of Form 1040 and gets added to the taxpayer’s other tax liabilities, such as income tax.

Taxpayers can take a deduction for 1/2 of the self-employment tax. The deduction is accounted for on Line 27 of the taxpayer’s Form 1040.

Answer

Self-employment tax is one of those things that can be deceptively hard to explain. On the surface, it’s simple enough — self-employment tax is the self-employed person’s version of FICA taxes.

But there are questions, like why is self-employment tax based on 92.35% of net income instead of 100% of net income? I tried to fumble my way through an answer in the post linked to under the “Setup” section of this post, and I’ve got it on my list to re-visit that topic sometime down the road.

And the question posed at the beginning of this post: why is there a deduction for 1/2 of self-employment tax, and why is it taken on the 1040 and not on Schedule C?

A deduction for 1/2 of the SE tax is allowed because half of the tax is technically an “employer” expense. Remember the FICA formula: 7.65% is withheld from the employee’s wages, and the employer matches another 7.65%. 7.65 + 7.65 = 15.3. That’s where the 15.3% comes into play.

Since half of the 15.3% is an employer expense, sole proprietor’s get a deduction for that half of the tax.

Now, why is it taken on the 1040 instead of Schedule C? I believe there could be a couple of answers to this is: 1) the tax is calculated on the 1040, therefore the corresponding deduction is also taken on the 1040; 2) a sole proprietor is technically not an “employee” of the proprietorship, so the deduction isn’t a Schedule C item but rather a personal item. Remember, there’s no such thing as a “salary” for a sole proprietor.

Confused Yet?

Like I said, I’m working on a new post to pull together more thoughts on self-employment tax. In my head, I understand how this all fits together and why, but some aspects of self-employment tax is surprisingly hard to put into words.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”