Taxes and Being Self-Employed

When you have a job working for someone else, your employer takes taxes out of your paycheck to pay the government. They take social security, federal and state taxes, and send the money to the government. When you are self-employed there is no one else to take these taxes and send them to the government.

Not only does your employer send your portion of taxes due, but they also have to contribute a portion over and above what comes out of your check, this is called the employer contribution. When you are self-employed it becomes your responsibility to pay all of these taxes yourself. This is a big reason many people shy away from trying to start their own business. It can be intimidating to realize that you will have to take care of paying all personal and business taxes on your own when you are self-employed.

When you have a job, your employer deducts what is called FICA taxes. These include social security and Medicare taxes. You receive a W2 at the end of the year and file your taxes with the government. But during the course of the year these FICA taxes have been sent by your employer on your behalf. The employer also pays a portion over and above what is withheld from your paycheck. When you are self-employed you are considered the employee and the employer so you must pay both parts of these taxes.

Self-employed people must pay what is called the SECA taxes, (Self-Employed Contributions Act) which includes all of the taxes an employee and an employer would typically pay. The rule is if you make more than $400 while being self-employed (independent contractor, sole proprietor or a partner in a partnership) you must pay the SECA taxes.

The current self-employed tax rate is 15.3%. This includes 12.4% for social security and 2.9% for Medicare taxes. Remember that you also have to pay your normal Federal and State Income taxes in addition to your SECA taxes. Depending upon how much you make while you are self-employed you may need to pay estimated taxes quarterly. Do not count on the fact that you will file your taxes at the end of the year like everyone else.

If you wait to pay any of your taxes until the end of the year, you may be hit with an underpayment penalty. You should hire a tax professional to assist you in determining if you need to make quarterly payments or if you are ok to wait till the end of the year to pay your taxes.

Anytime you are dealing with the IRS or the government you should hire a tax professional to assist you. They know the rules, and the rules change often! It is their job to keep up with the current changes and to make sure you don’t end up paying more than you have to!

Being self-employed can be very rewarding and can give you a sense of real accomplishment. Just be sure to follow the letter of the law when it comes to paying your taxes! Penalties and interest add up fast and have been the cause of many a business to fail!