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Taxes for Self Employed E-mail
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If you are a United States citizen and work for yourself, then IRS may require you to pay self-employment tax.

What is the self-employment tax?

The self-employment tax pays for Social Security and Medicare and is similar to the Social Security and Medicare taxes paid by regular employees. If you work for yourself, then you might owe self-employment tax and be required to pay it.

The way you determine how much self-employment tax you owe is with IRS Form Schedule SE, which has a fill in the blank format that will, when filled out, tell you the amount (if any) of self-employment tax you owe. One thing you will want to pay attention to is that whatever amount of self-employment tax you owe, half of that amount can be deducted when you are calculating your adjusted gross income for income tax purposes. Regular employees don’t get to deduct anything for SS or Medicare tax payments.

The self-employment tax rate is 15.3%, and consists of two separate taxes: A Medicare tax rate of 2.9% and a Social Security tax, whose rate is 12.4%. While 15.3% is a large cut, there is some good news; The 12.4% Social Security tax only applies to the first $94,200 of income (that is the total of wages, tips and all other earnings) in a given year, so if you make more than that, any amount over that you do not have to pay the 12.4% social security tax ($94,200 was the income upper limit in 2006; the number changes from time to time to account for inflation and cost of living adjustments). Unfortunately, the 2.9% Medicare tax is charged on ALL income, with no upper limit.

As a simple example, if you had $100,000 of income from your own business in a given year, you would owe 12.4% of the first $94, 200 (that would be $11, 681) but 2.4% of the entire $100,000 (or $2,400)

Are you self-employed?

The definition of self-employed used by the IRS is very broad and inclusive. In essence, if you are in business and are a sole-proprietor or in a partnership, you are self-employed. If you own a business or work in a trade in order to make money, the IRS says you are self-employed and thus you have to pay self-employment tax. Even if you only do this business or trade part-time, if you do it to earn money, the IRS says you are self-employed and have to pay self-employment tax. If you are the owner of a business and your business is not a corporation or an LLC, then you are, in most cases, by default, a sole proprietor and must pay self-employment tax. The definition used by the IRS does not leave a lot of loopholes.

The IRS website does say, however, “The regularity of activities and transactions and the production of income are important elements.” From this we can infer that if you help your neighbor move and he pays you $20, then you are not self-employed, because it is not a regular activity. You are not in the moving business; it was a one time thing. If, however, you put an ad on Craigslist saying you will help people move for $20, you are now, according to the IRS, self-employed, because you intend to do it regularly and for the purpose of making money.

Paying the Self-Employment Tax

If you are self-employed and have to pay Self-employment tax, the IRS does not want you to wait till the end of the year and pay it when you file your taxes. Instead, they want you to make what is known as Estimated Quarterly Tax Payments.

The IRS divides the year into four three month quarters and expects you to make a payment each quarter, based on one fourth of your estimated tax liability for the year. This applies to all self-employed people who believe they will owe more than $1,000 in taxes this year. If your taxes last year equaled more than $1,000, they expect you to file quarterly this year as well.

Another simple example: Let’s say that your part-time moving company had gross income of $12,000 for this quarter and deductible expenses of $2,000. This means you have $10,000 of taxable income for the quarter, so you would use form 1040-ES to determine the amount of estimated tax you owe.

One nice thing is that you are allowed to adjust for changes in your condition (in other words, you do not have to make the same payment each quarter). The IRS is really encouraging the payment of estimated taxes by electronic bank transfers, and if the amount owed is over a certain amount (it changes from year to year), payment by electronic transfer is required.

As Benjamin Franklin said, the two unavoidable things in life are death and taxes; while we can do nothing to prevent death, we can be smart and prepare ourselves to make the best use of existing laws to minimize the amount of tax we are expected to pay.

Comments (1)add
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written by kaciana , December 07, 2007
we are new at this and we have made about 90,000 this year could you estimate about how much taxes we will owe for the year
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