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.
Self-employed tax filers typically pay employment taxes on their net earnings. In recent years, some self-employed persons with higher levels of income have been assessed an additional Medicare tax.
The additional Medicare tax became effective in 2013 as part of the Affordable Care Act. Before the additional Medicare tax became effective, self-employed persons reported all of their Social Security tax and Medicare tax on IRS Schedule SE. Now, individuals with income levels above certain thresholds must use both Schedule SE and IRS Form 8959 to pay their Medicare tax.
Thresholds for the additional Medicare tax
Wage earners and self-employed persons alike are potentially subject to the additional Medicare tax. The tax is generally an additional 0.9 percent of income above the specific threshold amount for the following filing statuses.
There is an annual limit on the amount of earnings subject to Social Security tax. However, there is no upper limit on the amount of your earnings subject to Medicare tax. The additional Medicare tax on higher incomes cannot be calculated on Schedule SE. It must be reported on Form 8959. Although Schedule SE is used to add regular Medicare tax to your return, it also results in a beneficial tax deduction.
Regular self-employment tax rate
Employed persons typically pay 6.2 percent of their wages in Social Security tax and 1.45 percent of wages in Medicare tax. Employers generally make matching contributions, for a combined employment tax rate of 15.3 percent. With no employer, self-employed persons must pay the full 15.3 percent themselves with Schedule SE. However, half of the regular self-employment tax becomes a useful tax deduction.
Deduction for half of regular self-employment tax
The tax code generally allows a self-employed tax filer to reduce taxable income by one-half of their self-employment tax reported on Schedule SE. The change in the tax code in 2013 effectively reduced that benefit because the portion of Medicare tax reported on Form 8959 provides no consequent reduction in taxable income.
Like regular income tax, self-employment taxes generally must be paid in advance throughout the tax year. A large balance due at the time of tax filing can result in a penalty. If you are subject to the additional Medicare tax, consider it along with other taxes when estimating how much to pay throughout the year. Contact an accounting firm (like Herman & Cormany) for further assistance in tax preparation.
Share22 July 2016
