The Self-Employment Contributions Act (SECA) of 1954 is a tax law that requires the owners of small businesses—such as S corporations, partnerships, and sole proprietorships—to pay a tax of 15.3 percent of their net income from self-employment to cover their own Social Security, Medicare, and Old Age Survivors and Disability Insurance (OASDI) costs. Workers who are employed by a company or another person (rather than being self-employed) only have to pay half this amount, which is withheld from their paychecks. Their employer pays the other half. In effect, SECA requires self-employed persons to pay both the employer and employee portions of the Federal Insurance Contributions Act (FICA) tax (a combination of Social Security and Medicare). To make this situation more equitable, small business owners subject to SECA are allowed to deduct half of their SECA tax amount on their personal federal tax returns.

SECA taxes are computed on the basis of net earnings from self-employment. Net earnings are defined as the gross income derived from business activities, less the expenses incurred in the course of doing business. In this way, ordinary business expenses reduce the SECA tax paid by individuals. But some other expenses, such as the cost of contributions to Keogh or Simplified Employee Pension (SEP) retirement plans, are not deductible for the purposes of SECA taxes. As a result, SECA makes it more expensive for the owner of a business to fund his or her own retirement plan than to fund the same plan for employees, because a larger percentage of employee contributions are tax deductible. After computing net earnings from self-employment, the business owner then applies a 15.3 percent rate (based on two separate rates for Social Security and Medicare) on income up to $60,600. A lower rate is applied to higher income amounts.

The application of SECA to various types of small business enterprises came under dispute in the late 1990s. "Self-employment tax is just another area where the complexity of the tax law yields no easy solution," Jack Robinson noted in Outlook . One issue involved professional activities that were not classified as trades or businesses, and thus were not subject to self-employment tax. As Robinson explained, "Carrying on a trade or business requires regularity of activities, frequency of transactions, and the production of income." Another issue involved people who were wrongly classified as independent contractors when the employer's level of control over their work actually made them employees. Finally, a number of questions existed regarding the application of self-employment taxes to members of limited liability corporations (LLCs). Members of non-professional service LLCs who are considered limited partners—meaning that they do not have personal liability for the company's debts, do not have the authority to enter contracts on behalf of the company, and do not participate in the company's trade for more than 500 hours during the tax year—are not subject to self-employment tax.

In general, SECA is believed to adversely affect the small business sector of the American economy. Many political leaders have indicated that they feel small businesses hold the key to employment and economic growth. But legislation increased the SECA rate significantly during the 1980s. Prior to 1984, the SECA rate was set at 50 percent of the regular FICA rate and 75 percent of the regular OASDI rate, giving self-employed individuals tax advantages similar to those enjoyed by individuals employed by others. But between 1984 and 1990, the SECA rate was increased to 100 percent of FICA. Since FICA rates were already increasing due to double-digit inflation at that time, SECA rates had to rise even more quickly to catch up. This increase reduced the after-tax earnings of small firms and thus the availability of capital for small business expansion. As John Brozovsky and A. J. Cataldo II wrote in Management Accounting, "the small firm is taxed at higher rates on larger amounts, further hindering its efforts to expand facilities, increase employment, and provide economic stimulus."


Brozovsky, John, and A. J. Cataldo II. "Inflation Indexing and Small Business." Management Accounting. November 1993.

Evanson, David R. "Spare No Expense." Entrepreneur. August 1996.

Heatley, Warren. "New Equipment Leasing LLCs May Avoid SE Tax." Tax Adviser. February 1999.

Nadel, Alan A. "Self-Employment Tax Treatment of Keogh and SEP Contributions and Unreimbursed Business Expenses." The Tax Adviser. November 1995.

Phillips, Bernie. "Self-Employment Tax Treatment of LLC Members." National Public Accountant. January-February 1999.

Raby, Burgess J. W., and William L. Raby. "Partners, LLC Members and SE Tax." Tax Notes. May 1, 2000.

Robinson, Jack. "Are You Filing Too Many Schedule Cs?" Outlook. Winter 1999.

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