If you're self-employed, you obtain Social Security and Medicare coverage through the payment of self-employment tax. These are figured on Schedule SE.
If your net earnings from self-employment equal $400 or more, you must do both of these:
File Schedule SE
Pay self-employment tax
This is true regardless of your age, and even if you're receiving Social Security benefits.
For 2012, the self-employment tax rate is normally 15.3%. The rate is made up of both of these:
12.4% Social Security tax
2.9% Medicare tax
For 2012, the maximum amount subject to Social Security tax is $113,700. However, all self-employment income in excess of $400 is subject to Medicare tax.
To figure net earnings from self-employment, multiply your net business profit by 92.35%. You use this percentage since an employee is only required to pay one of these:
1/2 of Social Security and Medicare taxes
7.65% of wage income
A self-employed individual must pay "both halves," or 15.3%. So, the law equalizes the tax burden by reducing the income subject to tax by 7.65%. Here's the formula:
100% - 7.65% = 92.35%
You can deduct the employer portion of your self-employment tax as an adjustment to income on Form 1040. The amount you can deduct is usually 1/2 of the employer portion. This decreases your taxable income and, as a result, your federal income tax.