Self employed taxes – What are self employment Taxes? Who has to pay self employment taxes? How much are self employment taxes? What self employed tax deductions can you take? These are all questions that make filing a self employed tax return more complex and how best to reduce your tax bill.
What is Self Employment Tax?
The self employed tax is a small business tax consisting of FICA taxes primarily for individuals who work for themselves as a sole proprietor or independent contractors. Self employment tax is the equivalent to the FICA taxes withheld from the pay of most workers who work for an employer. These FICA taxes of most wage earners are figured by their employers and deducted from their paycheck. Self employed individuals must report their earnings and pay their taxes directly to IRS.
Who Must Pay Self Employment Tax?
Self employed taxpayers are required to pay self employment tax where the net earnings from self employment are $400 or more. The tax for self employed individuals is 92.35% of your net earnings from self employment. Net earnings are calculated by subtracting ordinary and necessary, trade or business expenses from the gross income you received from your trade or business.
What Is the Self Employed Tax Rate?
For 2016, the self employment tax rate is 15.30% on the first $118,500 of net income and then 2.9% thereafter. The 2016 rates remain unchanged from 2015. There is no limit to the amount that is taxable under the 2.9% Medicare portion of the self employment tax.
Medicare Tax Increase: Before “Obamacare”, the Medicare tax on salary or self-employment income was a flat 2.9%. After “Obamacare” there’s an extra .9% Medicare tax on salaries or self-employment income over $200,000 for single filers and $250,000 for joint filers.
How To Prepare a Self Employed Tax Return
Self employed taxpayers who are sole owners of the Company will report self employment income and self employment expenses on two self employment tax forms; Schedule C (Form 1040) and self employment taxes on Schedule SE (Form 1040). There are no separate filing requirements for self employed taxpayers.
Tax Help for Self Employed
Filing self employed taxes are generally more complex, because self employed tax returns generally require a greater understanding of self employment tax laws, self employed tax deductions, self employed tax credits, self employed tax benefits and how to calculated self employed tax. Self employed taxpayers should almost always seek professional help for self employed tax advice where the self employment expenses are significant.
Self Employed Tax Benefits
The tax rules for self employed taxpayers are similar to wage earners. However, the tax breaks for self employed are generally greater as the reported business expenses are not subject to the phase out rules normally associated with wage earners.
What Are the Self Employed Deductions?
Self employed taxpayers can deduct most any necessary and ordinary business expenses in calculating self employment deductions. There’s no “list” that you can find of all the self-employed tax deductions you can take because there’s just simply too many factors to consider.
The more common self employed tax deductions include advertising, rent, payroll and contract labor, office supplies, postage, travel, meals and entertainment and automobile expenses that are business related.
If you haven’t done so already, you should consider meeting with someone experienced in tax preparation who can help you plan to reduce your tax burden by maximizing your deductions and tax credits that may apply.
Paying Self Employment Taxes
In addition to filing year-end tax returns, self employed individuals will generally need to calculate and pay quarter estimated income taxes. Quarterly payments are due on April 15th, June 15th, September 15th and January 15th of the following year. If you don’t pay the estimates, you could be subject to penalties as well.
Tax Planning for Self Employed Individuals
Sooner or later you’re going to ask yourself – Should I incorporate? Well, that depends. That depends on how successful you think you’re going to be. If you incorporate, you’re going to pay more … pay more in filing fees, administrative costs, professional fees and more. But if you do it right, you may be able to save a lot more in income taxes then you’re paying right now because you’re getting hammered with self-employment taxes; sometimes almost as much as half of what you’re making.
Now it doesn’t always make sense. You need to balance the additional costs with the potential savings. If your business is growing, sooner or later you’re going to reach that point that we can help you save a lot. Not in all cases. Call us to find out more!