October 4, 2016

Do I Owe Self-Employment Tax?

                If you are "self employed" you must pay "self employment taxes." According to the IRS, you are self employed if you are a sole proprietor, independent contractor, member of a partnership, or are otherwise in business for yourself, including part-time businesses. 

                The term "self employment tax" or "SE tax" is somewhat a misnomer, as there are not taxes, per se, that are called self employment taxes. The term instead refers to certain taxes that are generally paid by a combination of an employer and an employee. If an employee is employed by an employer, the employer and employee are each liable to pay half of Social Security and Medicare taxes which are based on the amount of wages paid to the employee.The current rates for SE taxes (Social Security and Medicare) are: "6.2% each for the employee and employer, unchanged from 2015. The social security wage base limit is $118,500, unchanged from 2015.The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2015. 

                If you are self employed, you are required to pay both the employer and employee share of SE taxes.  Thus, self employed individuals must pay a combined total of 15.3% of net income for these taxes (on income up to the limit).  And, since there is not an employer that is paying wages in a paycheck subject to tax withholding, you are required to pay estimated quarterly taxes.  These taxes are owed on the net profit from business income. In order to determine any net profit you subtract qualified businesses expenses and deductions from your gross income to get the net profit. If you have a net loss of income, you will not owe taxes.

               Because tax laws are complicated and changing, it's wise to seek advice from a business attorney and an accountant with expertise in areas affecting self employed individuals. As an overview, the IRS Small Business/Self Employed website has helpful information and tax document links, found here: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Publications-and-Forms-for-the-Self-Employed