The earnings of a licensed real estate agent or broker (licensee) may be subject to the self-employment (SE) tax if substantially all of the licensee’s compensation as a real estate agent or broker directly relates to sales or other transactions rather than to the number of hours worked, and the licensee performs services under a written contract that says the licensee will not be treated as an employee for federal tax purposes, for example, an independent contractor agreement.

Who Must Pay Self-Employment Tax? 

Generally, an individual must pay SE tax and file Schedule SE (Form 1040) if net earnings from self-employment were $400 or more. Schedule SE is used to figure net earnings from self-employment. A licensee is self-employed if the licensee carries on a trade or business as a sole proprietor or an independent contractor. A sole proprietor, in most cases, owns an unincorporated business by him or herself. If a licensee is the sole member of a limited liability company (LLC), the licensee is a sole proprietor unless the licensee elects to treat the LLC as a corporation. For more information on this election, see Form 8832, Entity Classification Election, online at www.irs.gov/pub/irs-pdf/f8832.pdf.  

What Is Self-Employment Tax? 

SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from most employees’ paychecks. SE tax is computed using Schedule SE (Form 1040) (www.irs.gov/pub/irs-pdf/f1040sse.pdf). The SE tax rate is 15.3 percent: 12.4 percent for Social Security (old-age, survivors, and disability insurance) and 2.9 percent for Medicare (hospital insurance). Payments of SE tax contribute to an individual’s coverage for Social Security retirement benefits, disability benefits, survivor benefits and hospital insurance (Medicare) benefits. The failure to report all self-employment income may result in lower Social Security benefits upon retirement. 

For an explanation of how a person qualifies to be insured under the Social Security system and the benefits available under the Social Security program, locate and contact the nearest Social Security Administration office by visiting 
s044a90.ssa.gov/apps6z/FOLO/fo001.jsp.

Paying Estimated Tax 

SE tax on income not subject to withholding is typically paid by making estimated payments. A licensee generally would make estimated tax payments if the licensee expects to owe tax, including SE tax, of $1,000 or more when the form 1040 return is filed. For more information on estimated tax, including information on how to pay electronically, see Form 1040-ES, Estimated Tax for Individuals, online at www.irs.gov/pub/irs-pdf/f1040ese.pdf.

Figuring Earnings Subject to Self-Employment Tax 

Schedule C or C-EZ (Form 1040) is used to figure earnings subject to SE tax. For additional information, see the instructions for Schedule C or C-EZ (online at www.irs.gov/pub/irs-pdf/i1040sc.pdf). Gains or losses from the disposition of investment property and depreciable property or other fixed assets used in your trade or business are not included in earnings subject to SE tax. 

Real Estate Rent

Rental income from real estate is not included in earnings subject to SE tax unless the taxpayer is a real estate dealer or provides services to his or her tenants. A real estate dealer is engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Rent from real estate held for sale to customers is subject to SE tax. However, rent from real estate held for speculation or investment is not subject to SE tax unless special services such as maid service are provided to the tenants. Providing heat and light, cleaning stairways and lobbies, and collecting trash are normally-provided services. 

For more information about SE tax, see Publication 533, online at www.irs.gov/publications/p533/ar02.html.

WARNING: The information in this article is general information from the Internal Revenue Service Web site. ALWAYS confer with an accountant or other tax advisor for specific information and advice pertaining to your own personal situation. 

Standard Business Mileage Rates  

• For tax years beginning in 2005, the allowable deduction for business miles driven for the period January 1, 2005 through August 31, 2005 is 40.5 cents a mile. 
• The allowable deduction for business miles driven for the period September 1, 2005 through December 31, 2005 is 48.5 cents a mile.
• For tax years beginning in 2006, the allowable deduction for business miles driven is 44.5 cents a mile.