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Do You Understand Self-Employment Tax?

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Becoming a self-employed professional is beneficial for many reasons. After all, everybody gets tired of “working for the man” at some point in time. Before you jump the gun and quit your job, though, you need to understand what it means to be self-employed. More specifically, details such as self-employment tax need to be considered.

Even though it may be foreign to you, learning the ins and outs of self-employment tax is easier than you may think.

What is Self-Employment Tax?

Generally speaking, self-employment tax is a Medicare and social security tax for individuals who are self-employed. Most wage earners find that this tax is deducted directly from their paycheck. But since you are self-employed, this is not possible. You are responsible for paying this tax on your own.

Calculating self-employment tax can be done easily enough by using Schedule SE. It is important to note that half of your self-employment tax is deductible when figuring your adjusted gross income.

What is the Self-Employment Tax Rate?

At this time, the self-employment tax is 15.3 percent. There are two components of this tax: 2.9 percent for Medicare and 12.4 percent for social security. The first $106,800 that you earn is subject to the social security portion of self-employment tax. After this, additional earnings are not taxed. All of your earned income is subject to the 2.9 percent Medicare portion.

How to Pay Self-Employment Tax

Now that you know what self-employment tax is all about, you probably have another question on your mind: how can I pay the self-employment tax that I owe? To get started, you need either a social security number or individual taxpayer identification number. You must pay self-employment tax as you earn money. This is known as a pay-as-you-go tax system. You are required to make estimated payments if you owe taxes of $1,000 or more.

With a pay-as-you-go system, there are two options: you can have money withheld from your paycheck, or you can send estimated payments to the IRS. However, since you are no longer receiving a paycheck, you’ll need to remit estimated quarterly tax payments. If you forget to make these payments throughout the year, you will get a serious financial penalty from the IRS. Do not risk it. Stay organized, and make sure you make all your estimates tax payments by the 4 quarterly deadlines imposed by the IRS.

Do I have to Pay Self-Employment Tax?

Many people are confused when it comes to whether they actually need to pay self-employment tax. You are required to pay this tax and file Schedule SE if you meet either of these conditions:

1. Your earnings form self-employment were in excess of $400.

2. You make in excess of $108.28 in church employee income.

If you are still confused (and even if you aren’t), it is time to get in touch with a tax professional, such as a certified public accountant (CPA). Those who are new to the world of self-employment may not know the first thing about paying estimated taxes, or how much money they need to set aside. A CPA or other tax professional can help set up your payments while answering any questions that you may have. If you decide to go this route, make sure you take some to consider the various factors that play into how to choose a CPA

With this information you should have a better idea of what self-employment tax is all about, and how it can affect you.

(photo credit: mkosut)

Chris Bibey
Chris Bibey is a freelance writer who over the years has honed his personal finance experience by writing more than 100 feature articles on the subject. In his spare time, Chris enjoys sports - West Virginia football in particular!

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