What Is SECA?
Established by the federal government in 1954, the Self-Employed Contributions Act (SECA) requires self-employed individuals to pay 15.3% in taxes on net income. SECA taxes contribute to Medicare and Social Security retirement benefits for those who are self-employed.
If a small business owner pays employees, then the owner must pay the employee and employer portion of FICA taxes. However, to make the SECA tax law more equitable for self-employed individuals, the IRS allows them to deduct 50% of their SECA tax on their federal tax return.
Who Pays SECA Taxes?
SECA tax law applies only to self-employed individuals. The IRS considers someone to be self-employed if they do work as an independent contractor or a sole proprietor, including gig workers.
The IRS defines sole proprietors as “sole” owners of unincorporated businesses. Sole proprietors who own LLCs do not pay SECA taxes. Independent contractors and gig workers choose when and if they take a specific job offered by a company or another individual.
In other words, there is no employer-employee relationship between a business and independent contractors and gig workers.
Individuals qualifying as self-employed do not have to pay SECA taxes if they make less than $400 for any given tax year.
What Is the SECA Tax for 2023 and 2024?
For 2023 and 2024, the SECA tax rate is 15.3%. This is split between Medicare (2.9%) and Social Security (12.4%). The IRS requires self-employed workers to apply this tax rate to 92.35% of their net income. Note that the current SECA tax rate has been the same since 1990.
The Social Security tax rate of 12.4% is only applicable to self-employment income under $160,200. If a self-employed individual earns more than $160,200, they may have to pay a higher Social Security tax rate. However, there is no income cap for the Medicare tax rate of 2.9%.
How Do You Calculate SECA Taxes?
- First, subtract business expenses from gross income to get your net income. Example: You earned $20,000 as a freelance digital artist. After subtracting business expenses totaling $3,000 your net income equals $17,000.
- Next, calculate your taxable income, which is 92.35% of net income. Example: 92.35% x $17,000 is $15,700.
- Finally, calculate your SECA taxes, which are 15.3% of taxable income. Example: 15.3% x $15,700 is $2,402.
- For the tax year 2023, self-employed individuals making less than $160,200 are exempt from the Social Security part of SECA.
The IRS also provides a 1040 form online called Schedule SE to help with SECA tax calculations.
Are SECA and FICA Taxes the Same?
SECA and FICA taxes are similar because they are taxes that go toward a person’s Medicare and Social Security benefits. The primary difference is who pays for them. Self-employed individuals pay the full 15.3%, while employers cover half of an employee’s FICA taxes.
The Federal Insurance Contributions Act (FICA) funds retirement, survivor, disability, and a large portion of Medicare. Neither SECA nor FICA taxes contribute to Supplemental Security Income (SSI) benefits. That program is funded by taxpayers and managed by the Social Security Administration.
I Can’t Afford to Pay SECA Taxes. Will the IRS Help Me?
The IRS offers a number of tax payment relief plans to help self-employed individuals pay off SECA tax debt over time.
Long-term payment plans are referred to as IRS installment agreements. If the SECA tax debt is less than $50,000 (including interest and penalties) and the taxpayer requires more than four months (120 days) to settle the debt, they may qualify for an installment agreement.
Short-term IRS payment plans are for taxpayers who owe less than $100,000 in SECA taxes, interest, and penalties and can pay off the debt in less than 120 days.
In severe hardship cases, self-employed individuals can ask the IRS to temporarily delay collection of SECA taxes (Currently Not Collectible status) or even request that they reduce the amount of SECA taxes they owe (Offer in Compromise).
If the IRS does not approve tax relief for a self-employed individual, an appeal can be filed with the IRS Independent Office of Appeals.
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