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Jean   Murray

Memo to Small Business Owners - Minimize Self-employment Tax

By February 6, 2013

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Self-employment Tax is the "hidden" tax for small business owners. Self-employment tax is paid by business owners into the Social Security/Medicare funds for self-employment income. That is, you must pay taxes just like employees do, but you must pay the entire tax, while employees pay only half. Business owners do get a deduction from adjusted gross income for half of the tax, but it still ends up being 15.3% of your business income. Self-employment tax is calculated on Schedule SE then added to your income tax owed on the second page of your personal income tax return. If you pay estimated taxes, you should include an estimate for self-employment taxes to make sure you have paid enough tax during the year.

Read more about how self-employment tax affects your total tax on your personal tax return.

Since self-employment tax is so large, it's to your advantage to pay less self-employment tax.

My colleague William Perez at Tax Planning has an excellent article explaining how you can minimize self-employment taxes at tax time.

He also points out that you may want to increase self-employment taxes if your business income is low. If you want to use Social Security tax credits for your retirement, you may need to have higher self-employment taxes in some years.

Read William's entire article on self-employment taxes.

Read more about how to calculate self-employment taxes and file Schedule SE.

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