What is Self-Employment Tax?
If you work for yourself, you’re required to pay a self-employment tax, which comprises Social Security and Medicare taxes.
When you work for a business, your employer takes out 7.65% of your gross income to pay the federal government to fund Medicare and Social Security, while your employer pays the other 7.65%. Since you are both the employer and employee, you are forced to contribute both halves of the tax rate, which equals 15.3%.
The first $118,500 of your net income is subject to the Social Security portion (12.4%) of the self-employment tax rate, while you must pay the Medicare portion (2.9%) regardless of your net earnings.
Who Pays for Self-Employment Tax?
If your net earnings add up to more than $400 over the course of the tax year or $108.28 or more as a church employee, then you must pay self-employment taxes. Types of self-employment income may include:
- Income from your business or trade.
- Income from freelancing.
- Income from independent contract work.
How to Pay?
Generally, you use Schedule SE to report the self-employment tax and attach it to your Form 1040. According to the IRS, if you expect to owe more than $1,000 in self-employment taxes, you’re required to make quarterly estimated tax payments. You can estimate your taxes and pay them to the IRS using Form 1040-ES or the Electronic Federal Tax Payment System (EFTPS).
What Types of Deductions Can I Receive?
You cannot reduce the rate of self-employment taxes, but there are ways to lower your overall taxes.
Forming an S corporation helps mitigate your taxes. Self-employment taxes only apply to earned income, not dividends (unearned income). As an S corporation, your business is a separate entity from you. This means any money you make goes to the S corporation. If you paid yourself 65% in the form of a salary and left 35% as a dividend, you would save 35% in self-employment taxes.
You can also reduce your taxes by receiving deductions for “ordinary and necessary” business expenses. These expenses include, but are not limited to:
- Travel and transportation
- Rent for office space
- Supplies, equipment, and furniture
- Meals and entertainment
If your business had a net profit for the year, you can deduct the full cost of health insurance you use for yourself and your dependents.
Work with the Experts
1-800Accountant is a virtual accounting firm merging the convenience of technology with live support from real professionals, making taxes easy and personable for individuals and small businesses. Focus on growing your bottom line while our team of accountants, certified public accountants, and enrolled agents perform the heavy lifting – tax advisory and preparation, payroll, bookkeeping, and audit defense. For professional, year-round services at an affordable price, get in touch with us and schedule your consultation with America’s leading small business accounting firm.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.