Self-employment Tax

Self-employment is both sweet and bitter.

On the one hand, you are more likely to enjoy a life with more freedom and income. On the other hand, you need to worry more about your tax payment. Of course, you can ask help from professional accountants. However, it’s better for you to grasp the fundamental knowledge and procedures about tax even on your own.

Here we list the detailed tips for your self-employment tax paying.

1.Definition of Self-Employment Tax

It is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves, also called SE tax.In fact, this tax is the part that is usually withheld from the pay if you are a wage earner.

When you work like normal people, your earnings are taxed at a 6.2% rate for Social Security and 1.45% for Medicare. Additionally, your employer also contributes the same amount — a total of 7.65% of your wages.

However, in a self-employed situation, you are both the employer and the employee. So you have to pay with a 15.3% rate in total. And this is the self-employment tax rate of 2017.

This means that if a self-employed person’s net income up to $127,200, he or she will have a FICA tax of 15.3% (the 12.4% of Social Security tax plus the 2.9% of Medicare tax). The amount in excess of $127,200 will be subject to the 2.9% Medicare tax.

2.Self-Employment Tax payer

Generally, you must file tax if either of the following applies.

  • Your net earnings from self-employment (excluding church employee income) were $400 or more.
  • You had church employee income of $108.28 or more.

The self-employment tax rules apply to all ages even if you already receive Social Security or Medicare.

3. Two Necessary Numbers
In the first place, you must have a SSN or an ITIN.

Social Security number (SSN)

Don’t have one? Apply for one using Form SS-5. Or you can ask for manual service by calling (800) 772-1213.

Individual Taxpayer Identification Number (ITIN)
If you are a nonresident or resident alien, and not eligible to get an SSN, you can get an ITIN from the IRS. To apply for the ITIN, you need to file Form W-7.

After you get the number ready, you can file Estimated Taxes quarterly.

4. Calculation Tips

As a matter of fact, tax payment is not that difficult if you separate it into several small steps in a specific order:
1: Calculate Net Earnings and Taxable Earnings
2: Determine Tax Liability
3: Enroll in EFTPS

5. Withholding Tax V.S. Estimated Tax

For a better understanding of tax payment, it’s necessary to have a clear knowledge of common taxes, especially the withholding tax and estimated tax.

Withholding Tax

Withholding tax is one kind of the income tax. It means your boss pay it directly to the government  from your. And the amount withheld is a credit against the income taxes you must pay during the year.

According to the Internal Revenue Service (IRS),there are two different types of withholding taxes.Firstly, every employer in the United States should file the withholding tax according to employees’ personal incomes. And we call it the U.S. Resident Withholding Taxes.The other form is the nonresident withholding taxes. As long as you gain income within the United States, proper taxes is inevitable.

All nonresident citizens, who didn’t pass the green card or a substantial presence test, must file Form 1040NR if they are in a trade or business in the United States during the year. Meanwhile you can claim standard IRS deduction and exemption when paying U.S. taxes.

In a word, withholding tax is necessary for the vast majority of people that earn income from a trade or business in the United States.

Estimated tax

Whether you receive your income from a job, self-employment, or other sources. You must pay taxes on the income during the year.

Except for those have taxes withheld from their paychecks and sent directly to the IRS, others will need to make tax payments on their own in the form of Estimated Tax.If your income is not subject to withholding tax, such as income from self-employment, business earnings, interest, rent, dividends and other sources, you need to pay it in the way of estimated tax.

According to the IRS, we need to pay estimated tax quarterly, typically in 4 equal installments. Each period has a specific deadline, and your punctuality helps avoid penalties. Even if you’ve already missed a few installments for estimated tax, you should still try to pay them as soon as possible.

If you are one of them, you need to make estimated tax payments with IRS Form 1040-ES.

• Self-Employed Persons or Sole Proprietor Business Owners.
Estimated tax payments is necessary if your tax liability is more than $1,000 for the year, including both part-time and full-time enterprises.
• Partners, Corporations, and S Corporation Shareholders.
Business ownership earnings require estimated tax payments as well. Estimated tax payments occurs after $500 tax liability.
• People Who Owed Taxes for the Prior Year.
If you owed taxes at the end of last year, it probably means that too little was withheld from your paychecks, or you had other income that increased your tax liability.

6.  Tips for Choosing IRS Tax Forms 

Here are some tips that will help paper tax return filers choose the best tax form for their situation.
You can generally use the 1040EZ if:
• Your taxable income is below $100,000;
• Your filing status is single or married filing jointly;
• You are not claiming any dependents; and
• Your interest income is $1,500 or less.

If you can’t use Form 1040EZ, you may qualify to use the 1040A if:
• Your taxable income is below $100,000;
• You have capital gain distributions;
• You claim certain tax credits; and
• You claim adjustments to income for IRA contributions and student loan interest.

If you cannot use the 1040EZ or the 1040A, you’ll probably need to file using the 1040. The reasons you must use the 1040 include:
• Your taxable income is $100,000 or more;
• You claim itemized deductions;
• You are reporting self-employment income; and
• You are reporting income from sale of a property.

7. Different Self-Employment Taxes for Different business types

Self-employment not only brings your freedom, but also more responsibility.Except for a net loss, you for sure must pay self-employment tax. So it’s good for you to take a look at the following self-employment types.

Type 1 : a Sole Proprietorship or Single-Member LLC

If you are a sole proprietor or single-member LLC, your self-employment taxes are based on the entire net earnings of your business.

At first, you must determine the net income from your business, using Schedule C. Then you should use the Schedule SE to calculate self-employment taxes.And more information is on Line 57 of Form 1040.

Type 2 : a Partnership or Multiple-member LLC

Partners in a partnership and members in an LLC make you self-employed individuals instead of employees. For this type, you should be aware of total net income and your income share. Besides, Schedule K-1 and Schedule SE will come in use.

Furthermore, partners in a limited partnership and partners in a partnership which is taxed as a corporation are not self-employment.

What if you are both self-employer and an employee?
The answer is that you must pay income tax on income from all sources, including both self-employment income and employment income.That is to say, in addition to the self-employment tax for Social Security and Medicare, your employer must also collect FICA taxes from your wages. But there is a maximum on the Social Security tax.

In general, FICA taxes from employment comes first, and if the Social Security hasn’t reached the maximum, you should prepare the self-employment taxes as well.

In conclusion, both self-employed ones and employees actually pay the same taxes, just with different names.

8. Tax Audit and Tips for Avoiding It

When it comes to tax auditing, we often consider it to be a scary thing. As a matter of fact, it does lead to many annoying procedures. Despite its only 1.5% audit possibilities, we’d better be aware of the following to reduce your chances of being reviewed, whether you are companies or individuals.

1. Report All your income
2. Check the number error on the tax slip
3. Record on Schedule C
4. Separate your home from your business space
5. Submit a joint tax application
6. Do not forget to sign or submit your tax form
7. Check your personal information
8. Avoid A large amount of money transfer
9. Pay attention to tax relief

9. Tax Deductions for Self-employment
Being your own boss, not only brings free working time and much more financial return than a normal employee, but also gives you another various tax deductions. Let’s check the top 5 self-employment tax deductions you must remember.

Home Office Cost
Deductible items:
a portion of your mortgage or rent.
property taxes including repairs and maintenance.
cost of utilities including electricity, gas, water etc.
office supplies including paper, pens, ink, folders, staples, internet, phone, licenses and permits etc.
Advertising and Promotion: web hosting, business cards, advertising, fees to marketing agencies or promotional video producers, etc.
Equipment fees: computers, cell phones and iPads etc.
You can make find more deductible items in IRS Publication 587.

Education Expenses
Deductible items:
When you are working on a qualifying work-related education, all the related expenses go with tax deductions, including tuition, books, supplies,
lab fees, transportation to and from classes and other related expenses.
We should be aware of the education here only refers to those maintains or improves skills needed in your present work. For example, if you are taking classes for changing to another career, you are less likely to get the deduction. For more details for the deductible requirements, IRS Publication 970 would be useful to you.

Insurance Premiums
Deductible items:
All the medical and dental insurance premiums of you, your spouse, dependents and children who are younger than 27 at the end of the tax year.
Long-term care insurance premiums.

Transport and Treatment Fees
Deductible items
car expenses: depreciation, licenses, gas, oil, tolls, parking fees, garage rent, insurance, lease payments, registration fees, repairs and tires.
Meals and Entertainment: there is a 50% deduction for business treatment. So Keep a log and receipt.
Business related travel: Keep all your receipts and business information related to the travel.
According to IRS, you can get a deduction of the total business-related driving miles multiples by 53.5 cents per mile. So you’d better prepare a mileage log and all the related receipts if you are ready to apply for this deduction.

Retirement savings
Deductible items:
Contributions to a solo or one-participant 401(k) plan of up to $54,000 for 2017 or 100% of earned income, whichever is less.
Just like a standard, employer-sponsored 401(k). Your contributions are pretax, and distributions after age 59½ are taxed. You can contribute as both an employee (of yourself) and the employer, with salary deferrals of up to $18,000 in 2017, plus a $6,000 catch-up contribution if you’re 50 or older. And you can add approximately 25% of net self-employment income, not exceeding that $54,000 limit.