As soon as you plan to start your own business, you will learn about self-employment taxes. A self-employment tax/ self-employed tax is levied on those self-employed individuals who work for themselves, and it consists of social security and Medicare taxes. If you work for yourself and pay this self-employed tax for having your own company, withhold Social Security and Medicare taxes from your paycheck. When an employer or worker employs you for someone else, the total taxes that you have to pay will be lower than what you are paying as a self-employed.
The total self-employment tax rate is 15.3%. For Social Security, it stands for 12.4%, and for Medicare, it stands for 2.9%. All Self-employed individuals pay 12.4% of their net income. If you are a single filer and earn more than $200,000 or married and earning more than $250,000 (both you and your partner), you may have to pay an additional Medicare tax of 0.9%. The additional Medicare tax does not only apply to self-employment income but also to your combined wages and compensation too!
Who pays self-employment tax?
People employed in the business are self-employed and have to pay a self-employment tax/self-employed tax. You are categorized as self-employed when-
* You do a business as a sole proprietor or as an independent contractor.
* You are a part of trade business and a member of a partnership
* You are involved in a part-time business.
You also need to pay self-employment tax if you earn more than $400 working for yourself. According to IRS, you have to file an income tax return if your net earnings from self-employment are $400 or more. However, if your net earnings are less than $400 from self-employment, you can happily skip paying self-employment taxes on that amount. But make sure that you are reporting those earnings.
What are the basics for filing self-employment taxes?
It is essential to know your tax rate before you move ahead with the tax obligations and deductions. You need to calculate your net profit or net loss from your self-employed business. The amount can be calculated by subtracting your business expenses from your total business income. If the total expense is less than your total income, the difference is net profit, but if your expenses are more than your total income, then your business has a net loss.
Understanding your tax rate is an important step in filing your taxes. Also, it is your responsibility to know if any state and local taxes will be applied to you or not. Determine your net profit or loss during the taxable period. If you are a self-employed taxpayer, who expects to owe more than $1000 in self-employment tax, you must make estimated tax payments four times during the year.
Self-employment tax deductions:
Nobody likes to pay the extra money, and that too in taxes! There is a myth that self-employment taxes will cost you more because when calculating your income tax, you get to deduct half of your self-employment tax from your net income. To get an accurate figure of adjusted gross income, you can simply deduct the employer-equivalent portion from your self-employment tax. This deduction might affect your total income tax, not your net earnings from self-employment or your self-employment tax.
Whether you operate at a loss or profit, here are certain types of tax deductions that you don’t want to miss.
- Credit card interest –
If you make business purchases on your credit card, you might be able to deduct credit card interest on your federal tax return. However, any interest on an investment that is made for personal use is not liable for the deduction. Also, the IRS qualifies business purchases that are ordinary and necessary for the smooth operation of the business.
- Home Office deduction –
If you are self-employed and use part of your home for business, you will qualify for home office deductions, even if you’re a renter. Your home office must be used exclusively for business purposes and for personal work. It must be your principal place of business, where you have your meetings and complete work.
- Training and education expenses –
If you are pursuing higher education that will help your business to grow, then you might be able to take a deduction on your tax return. Your payment must be for education that maintains or improves your skills in your current line of work.
- Phone and internet costs –
You are liable for a phone and internet deduction as self-employed taxpayers for those services only, which are used for business purposes only. For example, if you split your phone use between personal and business calls, half your bill is deductible.
- Advertisement expenses –
Any cost incurred while promoting your business and services also gets a tax deduction. This can include social media promotion, online banner ads, print media, business cards, etc.
- Business travel and meals –
Expenses occur when you are traveling to meet a client or attend a meeting for the benefit of the business, and then such expenses will classify as self-employed deductible expenses. Keep in mind that the deductions can’t be very lavish and should be used only for business purposes.
Contact FlyFin for smooth payment of self-employment taxes:
Any part-time and newly self-employed business owners always worry about paying self-employment tax on the income they earn from their business. But since you are new to this area, you must be having a lot of doubts regarding the tax rate, deductions, and so on. With FlyFin, you can peacefully focus on your business. As the business grows, the number could work out in your favor, and you can save money. As a taxation firm, they aim to lower your tax amount so that you can focus on other areas of your business without worrying about payment. You can reach out at their website or can even call the executives and learn more about how they can help you save thousands of dollars.