If you’re self-employed you’re used to handling things yourself. From advertising and marketing your business to actually doing the work. When you’re self-employed you wear many hats. There is one thing, however, that may leave you struggling – taxes. If you are self-employed, here is what you need to know about taxes.
If you’re an employee, you will have noticed the fact that your paycheck never matches the salary on your offer letter. If you’re wondering why the answer is payroll taxes. You might think that you wouldn’t have to worry about those payroll taxes if you worked for yourself. But, unfortunately, that’s not the case. Even if you’re self-employed, you still need to pay a 15.3% self-employment tax. What is this tax and why do you have to pay for it?
What Is Self-Employment Tax?
The Federal Insurance Contribution Act (FICA) was established by Congress in 1935 to collect taxes to help fund Social Security and Medicare. The FICA tax is 15.3%, paid by employers and employees, who split the burden by each paying half. Employers pay 7.65% and their employees pay 7.65%.
This bill, however, didn’t account for those who were self-employed. That’s where the Self-Employed Contributions Act (SECA) comes in.
The SECA Act was established in 1954. It stipulated that without employers paying half the tax, self-employed individuals would pay the whole 15.3%. This tax paid by self-employed individuals is known as the SECA, or more simply, the self-employment tax (If you’re an Independent contractor trying to figure out how to pay your taxes, read this).
Who Needs To Pay Self-Employment Tax?
If your net earnings from self-employed work are $400 or more, then you probably need to pay self-employment tax. This includes individuals who have their own business, as well as independent contractors and freelancers. If you’re a salaried employee and the company you work for withheld payroll tax from your paycheck, then you don’t have to pay self-employment tax.
There are also some rarer instances in which you also would have to pay self-employment tax. For one, you still need to pay even if you are a U.S. citizen employed by a foreign government. You must also pay self-employment taxes if you earn more than $108.28 as an employee of a church. If you’re still unsure whether or not you should be paying self-employment tax on some of your untaxed income visit the IRS website. Or if you think you’ve filed a false or mistaken tax return, read this.
How Do You Figure Out How Much You Owe?
The total self-employment tax is 15.3% of your net earnings and consists of two parts. 12.4% of that goes toward Social Security. Only a certain amount of your annual income is subject to taxation for Social Security. The maximum amount may change annually and has steadily increased over time. It is $127,200 for the 2018 tax year.
The second portion of your self-employment tax goes to Medicare. The rate for Medicare lands at 2.9%. Regardless of how much you earn, Medicare taxes apply to all of your net earnings.
There you have it, everything you need to know about taxes if you’re self-employed. Still struggling? Or don’t have the time to worry about filing for taxes yourself? Contact Ayar Law at 248-262-3400 to resolve your tax problems today!