Self Employment Tax
Leaving the world of employment in order to build your own business is an exciting time. It means that you have the autonomy over your own time and money in order to create!
But, managing the financial side of running a business can become overwhelming if you are not prepared. Particularly, there are a number of extra taxes (and deductions) applicable to the self-employed that you’ve probably never heard about!
So, today we’re discussing the purpose and rates of self-employed tax, how to calculate it, and what you should know before filing.
What is Self Employed Tax?
Self employment tax applies to anybody who works for themself. Freelancers, business owners and contractors are all subject to self employment taxes when earning more than $400 per year (net). It is really not any different than what is withheld from your check if you work for a company along with what the company pays. Being self-employed just means you are responsible for all of it.
The tax rate for self-employed individuals currently sits at 15.3%. The purpose of this tax is twofold; 12.4% is paid into social security, while the remaining 2.9% goes towardMedicare. If you worked for a company half of this or 7.65% would be deducted from your paycheck. The other half would be paid by the company.
In 2021, the maximum income subject to this tax rate is $142,800. However, those earning more than this amount (net) would be subject to an extra 0.9% for Medicare for any above-threshold earnings.
However, it is important to note that you can deduct up to 50% on your taxes. Essentially, you pay it all in but then get to back out half.
How to Calculate
Self-employment tax can be a little difficult to calculate, but this is the general formula:
Find your net earnings by subtracting expenses from gross income.
The IRS states that 92.35% of your net earnings are subject to tax, so determine this amount.
If the total is below $142,800- calculate your self employment taxes at 15.3%
For totals above $142,800, calculate an extra 0.9%.
Let’s take a look at an example. Imagine your net earnings in 2021 total $120,000.
92.35% of $120,000 = $110,820
This total is below threshold so the 15.3% tax rate applies
15.3% of $110,820 = $16,955.46 owed in self employment taxes
If you require more help, schedule SE holds all information directly released by the IRS which can aid you in calculating the money that you owe. To declare your income and self-employment taxes, form 1040 applies.
Paying Self Employment Tax
After calculating the money you owe, the IRS requires quarterly estimated payments which typically fall on or around the 15th April, 15th July, 15th September and 15th January of the next calendar year.
Remember: there are a number of deductions that can be applied to your tax bill as a self-employed individual which can greatly reduce your earnings. These include:
Mileage deductions (for business trips)
Self-employed health insurance
Home office and continued education expenses
Office supplies and equipment, etc.
It is important to consult with a CPA or accountant that is knowledgeable about self-employment taxation.
We are here to help you navigate through all the information, help find you an accountant, and discuss if self-employment is right for you.Simply schedule an introductory call with me by clicking here to get the conversation started.