22 Jul What You Need to Know about Paying Self-Employment Taxes
Filing taxes for the wages you earned is relatively straightforward. However, if you’re an independent contractor or own your own business, things can get a bit trickier. If you’re feeling a bit daunted by the prospect of filing self-employment taxes, here are a few things that you need to know. And, while it may be trickier than a W2, you might be surprised by how simple it can be, once you have the right knowledge. If you still feel like you need a helping hand, contact one of our Provo self-employment tax experts.
What Are They?
First, it’s important that you understand what self-employment taxes are, as they are separate from your income tax. If you’ve ever received a standard paycheck, you’ll notice that there are several deductions made from your gross income. One is income tax, and the others usually include Social Security and Medicare taxes.
When you’re self-employed, however, the income you receive isn’t taxed upfront, so you’ll have to pay that income tax, Social Security tax, and Medicare tax when you file. Self-employment taxes refer to the Social Security and Medicare payments that wage earners already have deducted from their paychecks.
Who Pays Them?
If your net earnings from self-employment are $400 or more in a single year, and your business structure makes you susceptible to the tax, you will need to pay self-employment tax on that income. Again, untaxed income from independent contract work or a business that you own is considered self-employment income.
How Much Do I Have to Pay?
The self-employment tax rate is currently 15.3% of your self-employment income—12.4% for Social Security, and 2.9% for Medicare. In most cases, the Medicare percentage is applied to all of your net income from self-employment, while the Social Security portion applies to the first $128,400 of your self-employed income (for 2018). Certain exceptions do apply, so be sure to discuss this with one of our CPAs if you believe you’re exempt from any part of the self-employment tax.
An additional Medicare tax may also be applied to self-employment income that exceeds a certain threshold. Currently, the threshold amounts are $125,000 for married individuals filing separately, $250,000 for married individuals filing jointly, and $200,000 for all other individuals. You can find more information on the additional Medicare tax here.
How Do I File?
Reporting your self-employment taxes and income often only requires a couple additional forms. Your self-employment tax is reported on Form 1040, but you may have to add a few schedules to this, depending on your income. Form 1040, Schedule SE can be used to compute your self-employment tax, and attached to the rest of your tax return. Additional adjustments to your self-employment income can be computed using Form 1040, Schedule 1.
These few forms are usually sufficient for reporting your self-employment income, and calculating your tax liability for what you earned. You can then pay your taxes due as normal, using your preferred payment method.
Can I Deduct Them?
Many self-employed individuals cringe at the amount they have to pay in self-employment taxes. But, the good news is that half of your self-employment taxes can be deducted for income tax purposes. Report this deduction using Form 1040, Schedule 1. However, please be aware that this only impacts your taxable income for income tax purposes; it does not affect your net earnings from self-employment or your self-employment tax.
When Do I Pay Them?
Many individuals who receive self-employment income should make estimated quarterly tax payments to the IRS. This is because the US tax system is a pay-as-you-earn system; since your self-employment income is not taxed upfront, you’re expected to make periodic payments throughout the year. This requires you to estimate your income for the coming year (usually based on last year’s income), and make quarterly payments. Failure to do so can result in fines and penalties for underpayment of your taxes.
If you have any questions about self-employment taxes, estimated quarterly tax payments, or how to calculate them, contact our Provo self-employment tax experts. We’ll provide you with the information and assistance that you need.