If you are a self-employed individual, it’s easy to forget about withholding taxes from your income each month. Eventually when you pay them up at the end of the year, you end up getting a nasty shock when IRS reveals to you what you actually owe them. However, you can avoid this situation by knowing how much you owe before hand. It’s possible to know the estimated amount you are expected to pay in a calender year. Then you can put this money aside for your quarterly estimated tax payments.
Self-employment tax( social security and medicare taxes)
When self-employed taxes are mentioned, they only refer to social security and medicare taxes. They exclude other taxes, which are supposed to be filed as well. Self-employed taxes are only meant for individuals who are self employed.
To figure out how much you owe in self employed taxes, you’ll be required to use form 1040. However, for most wage earners, their social security and medicare taxes are figured by their employers.
Self-employment tax rate
- In the year 2010, the tax relief act reduced the self-employment tax by 2% for the Calender year 2011.
- The tax rate for that particular calender was 13.3%, of which 10.4% represented social security and 2.9% stood for medicare.
- Then the temporary payroll tax cut continuation act of 2011 extended that tax reduction of 2% to 2012.
- For self-employed individuals for the calender 2013, the rate has since climbed to 15.3%. This rate still consists of two parts, 12.4% social security (survivors, disability insurance or old age), and 2.4% medicare (hospital insurance).
Self Employment tax deductions
If you want to figure out your adjusted gross income, you can deduct your employer equivalent portion of your self-employment tax. But this deduction only affects your income tax, and not your net earnings from self-employment taxes. And if you file form 1040 schedule c, you may be qualified to claim the earned income tax credit, otherwise known as EITC.
It’s true that most self-employed individuals experience fluctuations in their income, which makes it difficult to estimate what they are supposed to pay in taxes. But you can easily avoid trouble by adding your total income for that particular year. There are two ways to go about it; Either you use figures from your best performing year, or you use figures from your average year.
Once you’ve added up the total. Deduct your qualified expenses. Don’t charge tax on your gross earnings. Only charge on your net earnings. Add up all your operating expenses and deductions and then subtract from your annual income.
Calculate your self employment tax. Like we said, this portion comprises of two parts, social security and medicare taxes. You’re going to use the latest figures as mentioned above.
It’s time to deduct half of your self-employment tax from your total income figure. The final figure you’ll arrive at is what you’ll used to determine your income tax.
This step involves finding your tax bracket. As at the time of publication, those with a single income of less than $34,000 and more than $8,500 were expected to pay an income tax rate of 15%. If you are not sure, you can check with the IRS because they have tables to help you know your tax bracket. To determine your annual income tax amount, take the relevant percentage and multiply by your annual income.
Add your income and self-employed taxes together. The amount you end up with is the total tax payment you are expected to pay at the end of the year. To make your work easier, divide this payment into 4 equal parts so that you make your payments in quarterly basis. But there are some instances when you accidentally end up paying more. In this case, you need not to worry because you’ll get that extra amount of money back. On the other hand, if you are short by a few dollars, then you’ll have to settle the balance with IRS.
Wage earners are people who are employed by someone else and their taxes are often withheld from their paychecks. They also pay social security and medicare taxes as well. However, these taxes are paid partly by the wage earner and partly by their respective employers. However, the self-employed are generally responsible for paying the entire amount since they serve as both employer and employee. If you run your own business, say as a sole proprietor or an independent contractor, you are considered self-employed, and so the above conditions apply.