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?
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.
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.
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.