Self Employed Contributions Act Tax (SECA Tax)

The Self Employed Contributions Act (SECA) tax is a levy from the U.S. government on those who work for themselves. It requires self-employed workers to contribute tax to pay both the employer and employee portions of the Federal Insurance Contributions Act (FICA) tax, which funds Social Security and Medicare. Sometimes known as self-employment tax, SECA tax was first imposed by the SEC Act of 1954.

SECA taxes are computed on the basis of net earnings, defined as the gross income derived from business activities, less the expenses incurred in the course of doing business.

Social Security tax is assessed at a basic rate of 6.2% for an employer and 6.2% for the employee. A business owner subject to SECA, then, will be taxed at 12.4% (6.2% + 6.2%) , as he or she is considered to be both an employer and an employee. There are limits, however, on how much income is subject to this percentage. The Social Security tax is only applied to the first $132,900 of net income, for a maximum tax of $16,480 (as of 2019). Any income above that level is not subject to Social Security tax.

The Medicare tax rate is 2.9% (1.45% for employer plus 1.45% for employee), and there is no exemption above a certain income. Total SECA tax is, therefore, 15.3%. So, a self-employed person having a net income of exactly $132,900 in 2018 would have to remit FICA taxes of 15.3% of their income (12.4% + 2.9%), which comes to $19,935.

High-income earners, however, face an additional SECA levy. Net income above $200,000 ($250,000 for married couples filing jointly) is subject to an additional 0.9% Medicare tax.

The employer portion of the payment is deductible as a business expense. In other words, the IRS allows self-employed individuals to use the employer half of the self-employment as a business deduction for purposes of calculating the tax. Consequently, after deducting the 7.65% half-portion (from 50% of the 15.3% total SECA tax), individuals who are self-employed typically pay SECA tax on 92.35% of their net earnings, rather than 100%. Still, the tax represents a significant cost of being self-employed.

Since taxpayers who are self-employed aren't subject to withholding tax, the IRS requires SECA tax to be included in the quarterly estimated payments of all their income taxes. If self-employed net earnings are less than $400 for the quarter, though, no SECA tax is payable. If income for the quarter is above this set minimum, however, SECA tax must be paid on the entire amount, including the amount under the minimum.