Self-Employment Tax
Who must may self-employment tax and why? Well, if you're
self-employed, you will be responsible for self-employment tax.
How do you determine your liability? For the purpose of
determining self-employment tax, you are self-employed if you
are a sole proprietor, an independent contractor, a member of a
partnership, or are otherwise in business for yourself. If you
are a self-employed individual, you will have a Schedule C to
attach to your Form 1040, and self-employment tax is computed on
Form 1040, Schedule SE. Individuals must pay self-employment tax
is they have net earnings of $400 or more and there are several
sources of net earnings that are used when figuring your
self-employment tax liability. In most cases, net earnings
include net profit from a farm or nonfarm business; if you
operate more than one business, your net earnings from
self-employment are the combined net earnings from all your
businesses. The upside to operating more than one business: If
you have a loss in one business, it reduces the income from
another. Self-employment tax is the self-employed individual's
contribution to social security and Medicare taxes; the old-age
taxes of employment.
The only difference between the employee and the self-employed
is the employee's social security and Medicare taxes are paid
half by the employee and half by the employer, when an
individual is self-employed; he/she is responsible for the
entire amount.
There are alternative methods that can be used for figuring
liability of self-employment tax and they are: The Farm Optional
Method and the NonFarm Optional Method. These methods may
qualify an individual to claim a larger Earned Income Credit or
Child Tax Credit; they may also, however, increase your
self-employment tax liability.
The maximum amount of earnings subject to self-employment tax is
currently $87,000.00. Now, when figuring your adjusted gross
income on Form 1040, you may deduct up to one-half of your
self-employment tax liability and if you are member of the
ministry or clergy you may request an exemption from
self-employment tax from the IRS.
When must self-employment taxes be paid? Generally, the
self-employment taxes aren't due until the end of the year, when
your personal tax return is filed. Why is it this way? The
self-employment tax isn't due until the end of the year simply
because of the fact that many self-employed business owners
don't file the net profit or net loss figures on their
self-employment earnings, until the year's end. If there is a
net loss, the self-employed individual receives a credit of
self-employment tax due, in the amount of one-half of the amount
due.
The self-employment tax is the self-employed individual's
equivalent to the social security and Medicare tax deducted from
employee's paycheck each week. The wage earner's taxes are
configured by their employer and are deducted on a weekly basis.
The self-employed individual isn't required to make weekly
payments of self-employment tax, but they are held liable for
the full 15.3 rate, that is split between the employee and the
employer in wage earning situations. In general, however, if you
expect to owe taxes in excess of $1000 for the year, you are
required to pay estimated taxes each quarter. In summary, if you
are self-employed, have net earnings of $400 or more, and file a
tax return, you will be subject to self-employment tax. To learn
more about individual liabilities, exemptions, and alternative
tax methods, please visit the online site for IRS Forms and
Publications at www.IRS.gov . Topic 554, Publication 517 and 533
will provide more detailed and situation specific information.