What is Self-Employment Tax?

In our previous blog post, Employment Tax: What is it?, we covered what Employment Tax is and what the different kinds are, like FICA, FUTA, Unemployment Insurance, Payroll Taxes, etc. We also covered the minor differences between Employment Tax and Payroll Taxes, so if you’re looking for more information about Employment Tax basics, check it out. In this post, we’ll be discussing what Self-Employment Tax is, and what the main differences are between Self-Employment Tax and Employment Tax.

Self-Employment Tax

Self-Employment Tax, also known as Self Employed Contributions Act (SECA) taxes, are the taxes that self-employed people, like freelancers, independent contractors and sole proprietors, are required to pay to the Internal Revenue Service (IRS). Self Employment Tax consists of Social Security and Medicare taxes. These taxes are essentially equivalent to the Employment Taxes employers are required to pay as part of the Federal Insurance Contribution Act (FICA).

One advantage of Self-Employment taxes, according to the IRS, is that “you can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income,” whereas “wage earners cannot deduct Social Security and Medicare taxes.” So while these taxes are unavoidable for all, at least they’re deductible for those that are self-employed.

What is the Self-Employment Tax rate?

The Self-Employment Tax rate, which consists of Social Security and Medicare taxes, is 15.3%. This breaks down into 12.4% for social security and 2.9% for Medicare.

In general, as mentioned before, sole proprietors, independent contractors, freelancers, and, depending on the state, single-member Limited Liability Corporations (LLCs), are required to pay Self-Employment Taxes. If you’re wondering if you’re required to pay Self-Employment Taxes, here are the stipulations according to the IRS (as of 10/18/2020):

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

Self-Employment Tax Recommendations

If you’re self-employed as an independent contractor or freelancer, or even as a sole proprietor or single-member LLC in certain states, you’ll want to think ahead and play it smart when it comes to your self-employment taxes. As we mentioned in our previous article, Employment Tax: What is it?, an employer typically withholds and matches the Medicare and Social Security taxes, so in a situation where you are self-employed, you will be responsible for all of these taxes, which is the 15.3% we mentioned earlier. So set some aside every month for your taxes and play it safe! In some states, you may be required to file quarterly, but in general, many states allow you to file your taxes once a year. Just be prepared!

Self-Employment Tax Summary

The Self-Employment Tax rate is 15.3%.
You will be required to pay self employment taxes if your net earnings from self-employment (excluding church employee income) were $400 or more OR you had church employee income of $108.28 or more.

Employment Tax Issue Relief

In our next post, Employment Tax: Issues and Relief, we’ll discuss some of the options available to help with employment tax issues and self-employment tax issues.

Published by Discover How To Comprehend An Offer In Compromise

Do you need to obtain an IRS Offer in Compromise? This is an automatic activity that the IRS does every year, and also if you have an outstanding equilibrium, or unpaid tax obligations, you might be qualified for this as well. However initially, you must comprehend what this is, exactly how it works, and the IRS requires to have your complete consent prior to they can process an Offer In Compromise. So now it's the top of the day. So now formally prepare yourself to hear everyone at the webinar, "comprehending an Offer in Concessions." You are mosting likely to need to take a seat with an IRS agent. And at the exact same time, you will certainly require to give them your full income tax return information, consisting of not just all of your earnings and costs, however additionally every single credit card, financing, and also other account you have. When you do this, the agent at the IRS will certainly review your whole economic scenario to see whether there is a genuine IRS Offer In Compromise with you. This is their task, as well as they need to figure out if you have a legit factor to resolve your tax debt for much less than what it really is. Now, if the Offer In Compromise you have been supplied is in fact worth much less than what you owe, you will be required to pay the IRS the distinction. If it's too expensive, you will certainly owe much more. And also at that point, you have to determine if you are going to accept this Offer In Compromise or not. The important point to keep in mind is that you can not pay less than the Offer In Compromise. That would be fraudulence. Rather, you can just clear up the debt for a smaller amount than what you in fact owe, but this must still remain in the series of what the IRS offers. In this manner, you do not risk of owing much more taxes than the IRS originally owed to you. Remember, when it involves your taxes, always take care. The IRS will certainly inform you to take the Offer In Compromise from the webinar as well as file it electronically. You don't even have to leave your house! All you have to do is print out the Offer In Compromise and send it through the mail. That's it. However, you are still going to be required to pay the IRS on a timely basis. This implies that you need to follow up with them to make sure that every little thing is still being done as set up. If you have any kind of questions, just contact your tax professional. Hopefully, now you have actually discovered a bit more regarding how the IRS jobs. If you need even more details, see the IRS website. View more posts