I have recently become self-employed and was shocked to learn that a self-employed person has to pay a separate tax. At first, I didn’t like the idea. I mean, who really likes paying any taxes! But then I found out that with the Self-Employment Tax, I would be paying into Social Security and Medicare. This will be very beneficial to me when I get older (if there is still a Social Security system by then, but that would be another entirely different article).
Organizing Your Documents
First, I have to add a side note here. If you are self-employed, you better be organized. You have to have all receipts, all papers, all forms filled out properly. You need a good system, whether it be a filing cabinet, some sort of system with boxes or whatever. You also need everything sorted into their kind, expenses for your Internet connection in one file, bills for cell phone in other file. You get the idea.
Then after you have all your files in order it is time to get busy.
The Basics of the Self-Employment Tax
First, Self-Employment Tax is based solely on business income after all your expenses. Thus, the reason for all that organization. You need to know what you spent all year and on what. This will be reported on Schedule C.
It consists of two portions. You will pay 12.4 percent on Social Security itself (if you made over $90,000 after expenses, first congratulations I envy you, you only have to pay 12.4 percent up to the $90,000, anything over that won’t have to be counted.). Then you will pay 2.9 percent on Medicare itself. (Sorry, if you made over $90,000 you have to count it here).
Even if your business takes a loss you have to pay some Self-Employment Tax, if you made $400 or more after expenses.
Reporting Your Self-Employment Tax
First, you file a schedule C with your form 1040.
Calculate your Self-Employment Tax on schedule SE and report the total tax calculated on scheduled SE in the other taxes section on Form 1040. By reporting it here the Internal Revenue Service can tell your Self-Employment Tax from your other income tax.
Now don’t be all sad. You do get a small break. You get to declare one half of your Self-Employment Tax as a deduction against your total income on Form 1040. Hey, every break helps.
Confused? Let’s Break it Down
Let’s say you made $20,000 after all expenses.
Your net earnings after you do your calculating on Form SE would be $18,470. ($20,000 X .9235)
Your Self-Employment Tax would then be $2,826. ($18,470 X .153)
$2,826 would be reported on Form 1040 in the other tax section.
Then one half of that Self-Employment Tax $1,413 (2,826 X .50) and would be reported on form 1040 as an adjustment in income.
Not too bad. Remember we all have to pay taxes and by being self-employed you are your own boss. You get to make some of the rules, just not the tax ones. And by paying into Self-Employment Tax you are paying into Social Security and someday you may need it.