Being self-employed is a dream for many. Being your own boss and setting your own hours are serious perks. But, they come at the cost of responsibilities, including taxes that can be complicated.
As a self-employed individual, you are required to pay the regular income tax as well as the self-employment tax.
It is made up of Medicare and Social Security taxes. It takes the place of the Medicare and Social Security taxes that are directly withheld from the paychecks of regular wage earners.
Employers directly calculate the Social Security and Medicare taxes of their employees. However, as a self-employed individual, you calculate the self-employment tax yourself using Schedule SE, i.e., Form 1040 or 1040-SR.
Self-employment tax is different from income tax (including federal and state income tax), though as someone who is self-employed, you are responsible for paying both.
Income tax is paid by anyone who earns money, regardless of how they are employed. In contrast, self-employment taxes are only paid by individuals whose employers do not pay their share of Social Security and Medicare taxes.
The Self-employment tax rate stands at 15.3%. It is a sum of 12.4% Social Security, which funds the Survivors, Old-age, and Disability Insurance Program (also known as Social Security), and 2.9% Medicare tax, which funds health insurance for people 65 and older and other people.
It is applied to net earnings, commonly known as profit.
The significant difference between the self-employment tax paid by the self-employed and payroll taxes paid by regular wage earners is that employees and their employers typically split the Social Security and Medicare bill, i.e., the employer pays 7.65%, and the wage earner pays 7.65%. In contrast, self-employed individuals pay both halves of the total 15.3%.
It begins by calculating the net earnings from self-employment for the tax year.
The IRS requires anyone earning $400 or more in self-employment income to file a tax return that includes a Schedule SE, which is used to calculate the amount of SE tax, or self-employment tax, that you owe.
Because self-employment tax is not the same as income tax, you're eligible to deduct between 50% and approximately 57% of your self-employment tax payment from your income tax. The precise amount would depend on your self-employment income.
Generally, you need to pay it if either of these things is valid during the tax year:
Age is not a bar for the application of these tax rules; even if you are on Medicare or are receiving Social Security.
If you reach the end of the tax year, and your estimated tax payments throughout the year aren't enough to cover your taxes, you might have to pay a fine. There are two situations where you can avoid the fine:
There are two ways you can make your SE tax lower.
Self-employment tax applies to income from self-employment, but if you form an S-Corp, your clients will pay your S-Corp for products or services instead of paying you directly. You would pay a percentage of the S-Corp's earnings to yourself as a salary, and the rest of the S-Corp's earnings would be profit, also known as dividends. So, the salary portion would fall under earned income for you and be subject to SE tax.
The dividends wouldn't be subject to the same, helping you to reduce the net income that you would need to pay this tax on.
Net profit = gross income minus business expenses. This means that the lower your net profit is, the lower your self-employment tax bill will be.
Common business tax deductions include:
Thus, figuring what you owe in SE tax can be tedious, but you can greatly simplify the process using A.I. tools like FlyFin's 1099 tax calculator. The FlyFin app guarantees maximum tax savings and the lowest self-employment tax bill. It's 100% accurate A.I. technology finds every possible tax deduction automatically, eliminating 98% of your work, as well as filing your taxes for you at a fraction of the cost.
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With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.