When you’ve made the transition from someone else’s employee to being your own boss, you gain the autonomy to create your own professional path. You get additional responsibilities, as well — including paying self-employment tax.
Self-employed individuals are required to not only directly submit the income tax they owe to federal, state and local governments, they must also remit self-employment tax to the IRS.
Who is a “self-employed individual”? The IRS defines a self-employed individual as someone who conducts business as a sole proprietor, independent contractor, member of a partnership, or is otherwise in business for herself or himself.
What is self-employment tax? According to IRS.gov, “Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.”
Employees of a company pay half of their Social Security and Medicare taxes (usually withheld from their wages) and the employer pays the other half. As a self-employed individual, however, a business owner must remit the entire amount. Most self-employed persons, because their tax typically isn’t withheld from paychecks, must estimate their self-employment and income tax amounts due and pay them on a quarterly basis.
Similar to the FICA tax that wage earners working for employers pay, the self-employment tax rate for tax year 2018 is 15.3 percent on the individual’s first $128,400 of net income and then 2.9 percent on net income beyond that. The rate consists of two parts: 12.4 percent for Social security and 2.9 percent for Medicare.
To pay self-employment tax, an individual must have a Social Security number or an individual taxpayer identification number. Schedule SE (Form 1040) can be used to calculate self-employment tax. Self-employed individuals can deduct the employer-equivalent portion (half of the total self-employment tax) in computing their business’s adjusted gross income, reducing the business income subject to income tax.
Neglecting to pay your taxes can result in fines and penalties, so it’s critical to stay current.
Here are some tips for consideration:
» Talk with an accountant and/or tax professional for assistance in understanding your tax obligations. This is especially important with the new tax laws in effect for 2018.
» Check the IRS Calendar for upcoming deadlines, and consider setting up reminders, so you’re notified of approaching tax deadlines.
» Keep accurate and up-to-date accounting records to help you more accurately calculate your taxes and budget for them.
» Visit IRS.gov for additional information.
And for guidance on all aspects of starting and running your business, contact SCORE to talk with a mentor.