You may have heard of self-employment tax and wondered if, and when, it might apply to you.
The self-employment tax isn’t complicated: it’s a tax that is a combination of Social Security and Medicare taxes. But many people are confused about when and under what circumstances they might be liable for it.
Taxpayers who have an employer are not subject to self-employment taxes. Why? It’s simple – they have Social Security and Medicare taxes withheld from their paycheck. Your employer matches the amount that is withheld from your paycheck and remits those taxes to the government.
But, if you decide at some point to work for yourself and run a profitable business, you likely will become liable for self-employment tax. If you incorporate your business and pay yourself a paycheck, then you will be an employee of that corporation and will have taxes withheld from your paycheck, so you won’t owe self-employment tax.
The self-employment tax rate is 15.3%, consisting of 12.4% for social security (old-age, survivors and disability insurance) and 2.9% for Medicare (hospital insurance). Paying self-employment tax is easy because it is reported as part of your annual individual tax return. When you file your taxes with TurboTax Self-Employed, your self-employment tax is automatically calculated based on your net profit (business income minus business expenses). In general, you have to file an income tax return if your net earnings from self-employment were $400 or more.
Though all of your net income (profits) from the business are subject to the Medicare portion of the self-employment tax, only the first $127,200 of your net income is subject to the Social Security portion. The self-employment tax rate is twice the tax rate that is imposed on employees for Social Security and Medicare taxes. That’s because you are paying both the employee portion and the matching employer portion. For that reason, the government gives you a tax deduction for half of the self-employment tax your owe, thus reducing your taxable income.
Don’t worry about knowing these tax laws. TurboTax Self-Employed will ask you simple questions about you and your business and give you the tax deductions and credits you are eligible for. When you use QuickBooks Self-Employed you can track your income, expenses, mileage, and capture your receipts year-round. At tax time, you can easily export your information to TurboTax.