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Interesting & Useful Articles on Tax

What is Self-Employment Tax?

By Dave Horwedel, EA

If you’re self-employed, you pay the self-employment tax on your income. This tax applies to sole proprietors, partners, or LLC members. It does not apply to Corporations.

The self-employment tax is the government’s way of collecting Social Security and Medicare taxes from your self-employment income. Tax owed is in addition to any income tax. In 2016, the Social Security tax is 12.4 percent on the first $118,500 in wages. The Medicare Tax is 2.9 percent on all your income – there is no ceiling. An additional .9 percent is charged on your income over $200,000 ($250.000 if married filing jointly).

If you’re an employee, a portion of your wages is hit with a Social Security tax. In general, half of these federal employment taxes are withheld from your paychecks while the other half gets paid by your employer. However, you pay the extra 0.9 percent Medicare tax if you are a high earner. Your employer doesn’t owe any part of this.

What you pay in self-employment taxes is likely to increase. As the Social Security tax ceiling increases to account for inflation, more and more of your income will be subject to the 12.4 percent Social Security tax.

Thus, we are looking at a 15.3% tax on most people’s income. It is not as obvious for the employee. For the self-employed individual, the 15.3 % tax can be VERY obvious come tax time, especially if he did not plan or set aside for it. Please note there is no “standard deduction” or “exemption” on self-employment income. The tax starts on your first dollar of net self-employment income.

Joining the ranks of the self-employed can be pretty heady stuff. Increased independence. No boss to report to. No fixed ceiling on your income. The opportunity to create a business you are proud of.

What to do?

If you have any questions or need any tax assistance contact Torchlight Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you.  Email us or call our Toll Free Number (877) 758 7797.

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