If you're new to the self-employment game, you may be surprised to discover that your tax bill at the end of the year is higher ...
If you're new to the self-employment game, you may be surprised to discover that your tax bill at the end of the year is higher than it is if you're an employee. That's because when you work for yourself, you're required to pay a self-employment tax toward Medicare and Social Security in addition to paying other applicable state and federal taxes. In effect, you pay both the employee and employer portions.
It's best to set aside funds throughout the year for the SE tax to avoid getting stung at tax time. Timely and accurate payment of the SE tax will help you maximize the Social Security benefits you can receive later in life. You're required to pay SE tax if:
- You are a sole proprietor or independent contractor.
- You are a member of a business partnership.
- You run a part-time business.
- You earn more than $400 in a year from self-employment.
To calculate and pay the SE tax:
Calculate your SE taxesThe amount you pay in SE taxes is based on the amount you receive from your self-employment activities, minus any allowable expenses you incurred while earning that income.
Get help from accounting softwareAvoid costly mistakes from miscalculations by using software that automatically calculates your SE taxes for you.
Use the proper forms to report your SE taxesTo report your SE taxes, you'll need to file Schedule C of Form 1040, on which you report your net profit or loss, and Schedule SE, on which you calculate your SE tax.
Schedule C and Schedule SE.
Take your deductionsYou can deduct half of your SE tax when figuring your adjusted gross income.
Form 1040, which you can download from the IRS Web site.
Make sure the parties you worked for accurately reported your compensationEmployers are obligated to report to the IRS any payments to you above a set minimum. Companies will also send you a copy of the Form 1099 they sent to the IRS. Compare the information on the 1099 with your own records to insure the company correctly reported the amount they paid you.
Form 1099 Correction, which can be done using a number of accounting and payroll software and online services that are listed on the IRS Web site.
- Family members, such as a husband and wife, who run a business together, should report their net earnings on separate self-employment returns even if a joint income tax return is filed.
- The taxes you owe in a particular quarter depend on the amount of money you earned during that period.
- Keep a log of checks and expense receipts on a spreadsheet, by date, and also include, where allowable, items such as depreciation and the portion of your mortgage interest attributable to your home office.
- Keep all your tax records in a portable plastic file box so you'll have all the documents you need when meeting with your accountant.
- While rates can change, self-employed individuals were recently required to pay 15.3 percent of their income in SE taxes. The amount includes Social Security taxes of 12.4 percent and 2.9 percent for Medicare. All wages, tips and net earnings are subject to the 2.9 percent Medicare tax. Any changes to these rates will be described in the IRS tax forms you use to file for a particular tax year.