Being a self-employed individual has unlimited earning potential and flexible schedules, but of course comes with some extra responsibilities. For our purposes, we’re referring to what’s understood as “self-employment taxes.” In tax speak, that refers to the Social Security and Medicare payroll taxes that would normally be withheld by an employer for their employees.
Self-Employment Earnings
As a self-employed worker, the individual now becomes responsible for both the “employer” and “employee” portions of the tax, currently at a rate of 15.3 % (12.4% for Social Security and 2.9% for Medicare, 2020) on combined earnings. The first $137,700 (2020) of earnings is subject to the Social Security portion of the tax, while the remaining 2.9% Medicare portion is not subject to a limit.
Self-Employment Deduction
You may have heard of a “Self-Employment Tax Deduction” that allows self-employed individuals use for their taxes. To clarify, this is a business deduction available to self-employed individuals that allow them to deduct the employer portion of their “employment tax” towards their federal income tax. In simpler terms, you’re using a portion of what would be your payroll taxes as a business deduction towards your income tax. Check out our article on the different tax types for more info.
File & Pay
Self-Employment taxes are reported on Schedule SE for the Form 1040. The self-employment tax deduction is reported on line 13 of Schedule SE and on Schedule 1, line 14 of the Form 1040. The deduction goes towards your adjusted gross income and can ultimately help lower your income tax.
Self-employment taxes are just an additional responsibility for the independent worker. However, individual business owners often have a full plate running their business and tax concerns may be on the backburner. Having some backup to handle those issues can free business owners to focus on their main goal, growing the business! Count on us here at MiklosCPA, a CPA firm focused on helping small and emerging business clients with their tax and accounting needs through the latest in “virtual office” operations. Give us a call to learn how we can help your business succeed, and don’t forget to subscribe to our social media pages.