Self-employment Taxes Explained
What are Self-employment Taxes?
The term "self-employment taxes" describes those taxes that someone who is a business owner must pay. You must pay these taxes on your total net earnings from your business each year.
So How Do Self-employment Taxes Differ from "Employment Taxes"?
Everyone who is employed in the U.S. must pay FICA taxes. (FICA stands for “Federal Insurance Contributions Act.") FICA has two parts: the first is Social Security (actually called Old Age, Survivor, and Disability Insurance, or OASDI), and the second is Medicare. The Social Security portion of the tax is 12.4% up to $102,000 (in 2008) and the Medicare portion is 2.9%. Employees pay half of this tax and their employers pay the other half. Self-employed individuals pay the entire amount. Employees have OASDI and Medicare deducted from their gross income before taxes; the OASDI deduction is 6.2 percent and Medicare is 1.45 percent for a total of 7.65 percent. If you are self-employed, you must pay the entire 15.3 percent, based on the profits of your business.
How are these taxes calculated?
When you fill out your personal income tax return, you include your net income from self-employment. This net income is your gross income from your business less your deductible expenses. Your self-employment taxes are calculated on Schedule SE which is then brought on to your Form 1040 on 58. Any amount you owe for self-employment tax is added to your personal tax liability for the current year and is paid to the IRS.
How Do I Pay These Self-employment Taxes?
You pay these taxes along with your federal income tax. If you expect to make a profit this year, you should pay estimated taxes, including self-employment taxes, based on your estimated liability for self-employment taxes. Note that you pay these amounts to the IRS, and they in turn send on the records of payment to the Social Security Administration, so you can receive credits for income and payment on your Social Security calculation.
What if I work as an employee and I also own a business? Must I Still Pay Self-employment Taxes?
Yes. You must pay Social Security/Medicare taxes on the amount you earn as an employee; these amounts are deducted by your employer and sent to the IRS. You must also pay self-employment taxes on your net earnings from your business. You are responsible for paying those yourself.
