The Self-Employment Tax – TurboTax Tax Tips & Videos

overview Have you started your own clientele, freelance, or work as an independent contractor ? then get cook to pay the self-employment tax, which is a tax you never had to pay as an employee. The self-employment tax ( officially known as the SECA tax for Self-Employment Contributions Act tax ) is the freelance person ‘s version of the tax paid by employers and employees for Social Security and Medicare, and it ‘s due on your net earnings from self-employment .

Do I need to pay the self-employment tax?

Woman working on a sewing machine
therefore, you ’ ve started a clientele or decided to freelance, and freed yourself from the day by day grind of that old caper. But there ’ s no exemption from paying taxes. In fact, you ’ ll owe tax that you never had to pay as an employee. The self-employment tax ( officially known as the SECA tax for Self-Employment Contributions Act tax ) is the freelance person ‘s translation of the FICA ( Federal Insurance Contributions Act ) tax paid by employers and employees for Social Security and Medicare, and it ‘s due on your net income earnings from self-employment.

What is the self-employment tax?

many newly freelance people—sole proprietors, independent contractors and the like—are surprised at their tax bills at the end of the year because they notice they ‘re suddenly paying a lot more in tax as a freelance person than as an employee. That ‘s because they ‘re carrying the full moon effect of paying for their Social Security and Medicare .
When you ‘re an employee, you share that cost with your employer, with each of you paying a contribution of the FICA tax. When you ‘re freelance, though, you ‘re stuck with the full fully sum yourself .

The tax is divided into two parts:

  • 12.4% for Social Security. For 2021, this part of the tax applies to the first $142,800 of earnings. If you earn more than that (from self-employment or, if you also have a job, from the combination of your job and your business), then the 12.4 percent part of the tax that pays for Social Security stops for the year.
  • 2.9% for Medicare. The Medicare portion of the self-employment tax doesn’t stop. No matter how much you earn, you’ll pay the 2.9 percent Medicare tax. For more information on this tax, see IRS Tax Topic 554: The Self-Employment Tax.

How do I report the self-employment tax?

Of course, a modern tax means newfangled paperwork excessively. When you start a little business and you do not incorporate or form a partnership, you report the results of your operations on Schedule C and file it with your form 1040 .
You calculate your self-employment tax on Schedule SE and reputation that amount in the “ early Taxes ” section of Form 1040. In this room, the IRS differentiates the SE tax from the income tax .

Good news

When figuring self-employment tax you owe, you get to reduce self-employment income by half of the self-employment tax before applying the tax rate. Say, for exercise, that your final self-employment income is $ 50,000. That ‘s the sum you report as taxable for income tax purposes on form 1040.

But when figuring your self-employment tax on Schedule SE, Computation of Social Security Self-Employment Tax, the taxable come is $ 46,175. not paying the 15.3 percentage tax on $ 3,825 difference in this example saves you $ 585 .

More good news

You can claim 50 % of what you pay in self-employment tax as an income tax deduction. For exercise, a $ 1,000 self-employment tax payment reduces taxable income by $ 500. In the 25 percentage tax bracket, that saves you $ 125 in income taxes. This discount is an alteration to income claimed on imprint 1040, and is available whether or not you itemize deductions .

An example

  • You run a catering business as a sole proprietor.
  • In 2021 your net profit as reported on Schedule C is $35,000.
  • Your net earnings as calculated on Form SE would be $32,323 ($35,000 x 0.9235).
  • Your self-employment tax would be $4,945 (32,323 x 0.153) and you would report that amount on Form 1040 in the “Other Taxes” section.

then you would report one-half of your self-employment tax, $ 2,473, ( $ 4,945 X .50 ) on kind 1040 as an adjustment to income, which reduces your adjusted Gross Income and the amount of income tax you owe .

Should I file estimated taxes?

If you have worked as an employee, you know that what you get in your paycheck is normally less than what you in truth made. Why? Because your employer withheld money for Social Security, Medicare and income tax and sent that money to the government.

When you are freelance, the stallion burden for paying employment taxes and prepaying estimate income tax liability is left to you. The politics wants you to make payments of your estimated taxes throughout the year in quarterly installments. If you do n’t, you may be subject to underpayment penalties .

  • If you’re not sure whether you meet the definition of being self-employed, see IRS Tax Topic 554: The Self-Employment Tax.
  • For more information on estimated taxes, see this IRS article on Estimated Taxes.

TurboTax Self-Employed will ask you simpleton questions about your liveliness and avail you fill out all the correct forms. Perfect for independent contractors and little businesses. We ’ ll search over 500 tax deductions to get you every dollar you deserve and help you uncover industry-specific deductions .

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