What Is the Self-Employed Contributions Act (SECA) Tax?

The Self-Employed Contributions Act (SECA) tax is a levy from the U.S. government on those who work for themselves, rather than for an outside company. It requires self-employed workers to contribute the tax that is equivalent to both the employer and employee portions of the Federal Insurance Contributions Act (FICA) tax, which funds Social Security and Medicare.

Understanding the Self-Employed Contributions Act (SECA) Tax

SECA taxes are computed on the basis of net earnings, defined as the gross income derived from business activities, minus 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. Self-employed taxpayers subject to SECA are taxed at 12.4% (6.2% + 6.2%), as they are considered to be both employer and employee.

There are limits, however, on how much income is subject to this percentage. For 2023, the Social Security tax is only applied to the first $160,200 of earnings. In 2024, the tax will be applied to the first $168,600 of earnings. Any income above that level is not subject to Social Security tax.

The Medicare tax rate is 2.9% (1.45% for employers plus 1.45% for employees), and there is no exemption above a certain income. The total SECA tax is, therefore, 15.3%.

Deducting the Self-Employed Contributions Act (SECA) 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 tax as a business deduction for purposes of calculating the taxpayer's income tax. This takes into account that the efforts of running a company are taken on by an individual, rather than an employer, which would be the case for an employee of a company.

It is important to note that self-employment taxes refer to Social Security and Medicare taxes, similar to FICA taxes paid by an employer. When a taxpayer takes a deduction of one-half of the SECA tax, it is only a deduction for the calculation of that taxpayer's income tax. It does not reduce the net earnings from self-employment or reduce the self-employment tax itself.

Paying the Self-Employed Contributions Act (SECA) Tax

Since taxpayers who are self-employed aren't subject to withholding tax, the IRS requires SECA tax to be included in quarterly estimated payments of income taxes. If self-employed net earnings are less than $400 (or $108.28 from a church or other qualified church-controlled organization exempt from employer Social Security and Medicare taxes), no SECA tax is due, and it is not required to be listed on a tax return; however, if self-employed net earnings are above this minimum, SECA tax must be paid on the entire amount, including the amount under the minimum.

The Bottom Line

Almost everyone who is self-employed is required to pay the SECA tax. This levy represents both the employer and employee portions of the Social Security and Medicare taxes. As such, these individuals are charged 15.3%, which accounts for 12.4% (6.2% and 6.2%) for Social Security and 2.9% (1.45% and 1.45%) for Medicare. These taxes can be paid each quarter with estimated payments of a self-employed individual's income taxes.