I still remember the first time I filed taxes for my business. In addition to having no idea what a write-off really was, I also didn't worry too much about guessing on the numbers. A few government audits later, I discovered what it really meant to do things the right way. Over the years, I have met lots of business owners that weren't too worried about fudging the numbers, and nearly all of them have run into problems. Proper accounting is important, which is why I created this website dedicated to business accounting. I know that if you learn the right way to do things and focus on integrity, your business can avoid a world of problems.
Filling out your taxes for 1099 contract work or as a self-employed taxpayer? You might have just discovered a little-known but important facet of working for yourself - the Self-Employment Tax. What is it and how can you avoid paying too much?
What is the Self-Employment Tax?
The Self-Employment tax is the full portion of your Social Security and Medicare taxes based on your income. While wage employees also pay a contribution to their Social Security and Medicare taxes, their employers pick up a matching contribution. When you are essentially your own employer, you must pay both halves of this tax. For 2014, this means 12.4% for Social Security and 2.9% towards Medicare.
The fact that this entire amount is paid by the 1099 worker can cause a lot of surprise tax bills at the end of the year. This 15.3% additional tax on income is added on to any previously-calculated personal income tax due (which is paid at the same rates as wage earning employees).
How Can You Reduce it?
The SE tax is based on your taxable income. This means that anything that reduces your taxable amount of income reduces the amount charged for Self-Employment Tax. For those who worked for themselves, this generally means reducing the amount of profit (or increasing the amount of loss) on the Schedule C.
How do you do that? Business expenses. Keep good records of all your business expenses, regardless of whether you're sure they will be deductible or not. Your accountant or bookkeeper can help you determine what is deductible and what isn't. Some important records that most self-employed people need to keep track of - but often forget - include mileage (via mileage log books), all supplies (even small ones can add up), costs of health insurance, and jobs that fail to pay you.
Reduce the Stress
There's no way to completely avoid the SE tax if you have decided to work for yourself. But you can make it less stressful at the end of the year by paying quarterly taxes. Quarterly taxes are a way to prepay your taxes throughout the year just like a regular W-2 worker does via employer withholding. You can write a check yourself or electronically debit 1/4 of your projected tax every three months and send it to taxing agencies and the IRS. This can prevent you from getting an unwelcome surprise come filing season.
Working for yourself is a great way to earn a living. It has many pluses - like a flexible schedule, doing something you love, and answering only to yourself - but it also has responsibilities. The Self-Employment Tax is one of them, but a little education and foresight will help you keep it as low as you legitimately can.
For more information, contact Kamphaus Henning & Hood or a similar firm.Share
18 February 2015