For those of us who earn self-employment income, tax time can be painful. Self-employment taxes can seem like a double hit. (Though, in 2011 we got a little break in self-employment taxes because of the payroll tax cut.) You pay your income taxes and then you pay self-employment taxes too. Why? What are self-employment taxes? Find out all about the self-employment tax, including how much it is and how to pay it.
What are self-employment taxes?
Self-employment taxes in the U.S. are how sole proprietors, independent contractors and some partners in businesses pay the Medicare and Social Security taxes that other workers usually pay via payroll taxes, also known as FICA (Federal Insurance Contributions Act).
Self-employment tax is calculated and paid when you file your federal income tax, but it is not part of your income taxes. When you are employed, your employer takes these taxes out of your paycheck, and the total amount you paid for the year is detailed in your W-2. However, when you are self-employed these are paid all at once when you file your income taxes, though if you make quarterly estimated tax payments self-employment taxes are part of that.
How much are self-employment taxes?
The self-employment tax is usually* 15.3 percent (12.4 percent for Social Security and 2.9 percent for Medicare) for the first $106,800 of self-employment income.
This sound steep, but it is no more than is collected for these same payroll taxes from employees of a company. The difference is that in an employment situation employee and employer split these taxes, each paying 7.65 percent. When you are self-employed, you pay both parts.
*Note: For income earned 2011, the 2010 Tax Relief Act reduced Social Security taxes by 2 percent, so self-employment taxes were in turn reduced to 13.3 percent for 2011.
Who must pay self-employment taxes?
Anyone (excluding church employees) with self-employment income of $400 or more or those with a church employee income of $108.28 or more are required to pay self-employment taxes.
How do I file self-employment taxes?
Self-employment taxes are entered on line 56 of your 1040. However, this amount is calculated on Schedule SE. If you are filing a Schedule SE, you will also be filing a Schedule C (used to calculate profit or loss from a sole proprietorship), Schedule F (used by farmers) or Schedule K-1 Form 1065 (used for partnerships and joint ventures).
How can I reduce my self-employment taxes?
How much you pay in self-employment taxes is based on your net business income, so the only way to reduce your self-employment taxes is to reduce your net income. Be sure you are taking all the self-employment deductions you are allowed on your Schedule C (or other business income tax schedule) as this will reduce your net business income. Deductions on Schedule A or IRA contributions do not reduce your net business income and will not reduce your self-employment taxes.
Can I deduct my self-employment taxes?
You can deduct half your Self-Employment Tax when figuring your gross adjusted income. This will reduce the amount of income tax you pay. Because you are your own employer, you are entitled to deduct the half of the FICA taxes that you pay as an employer, just as any other employer would.
I am not a tax attorney, CPA or tax preparation specialist. The information here is meant as a general guide. For specific questions about your own taxes, please refer to IRS publications or consult a tax specialist.