Posted by Fred Lake

Self-Employment Tax Basics Information

Self-Employment Tax Basics Information

For someone who owns their own business, they are considered self-employed and then pay self-employment taxes.  These funds then go to towards social security and Medicare.  As to how much you will need to pay when it comes to business taxes, there are a variety of factors that will help determine this amount.  If you register your business as a corporation, you will pay these taxes but they are called FICA taxes which covers the same amounts.

Self-Employment vs Employee

You may wonder what the difference is between being self-employed and an employee when it comes to taxes.  One of the biggest differences is that a person who is self-employed has to pay 100% of the fees for these items which are based on the income from your business.  But on the offset, they are able to use the employer portion of the fees as a deduction on their taxes.  An employee pays a portion and their employer the other portion but there is no deduction on the personal taxes, only on the corporation's business taxes.

Self-Employment Tax Calculation

When you are filling out your personal income tax, you will include the net income earned from your business.  This number will be used to calculate how much you owe for self-employment.  You will complete a schedule SE to do the calculation.  Be aware that there are several ways to do this so it may be best to get a professional to do this, especially the first year.  This is brought forward on Form 1040 on Line 58.  Any amount that is owed for the tax is added to any personal tax liability and is payable to the IRS.

Accounting and Bookkeeping

When you run your own business, it's important to make sure that you keep your paperwork current and accurate.  For this reason, it is a good idea to look at everything on a monthly basis if not a bit more often than that.  If you do not have a lot of transactions, each month should be good enough.

Reconcile your accounts, keep up on your receivables and make sure that you have entered all your income and expenses into whatever you use are using for bookkeeping purposes.  There are a lot of good software programs out there for accounting and bookkeeping that should handle most of what you will need for business.  As your business grows, you typically can add other elements such as payroll for employees.

By keeping up on everything, when it is tax time, it will go a lot faster and smoother.  By having your bookwork current, filling out the forms for your business taxes will allow you to fill them out faster and more accurately.  Trying to do a years' worth of accounting at one time can be difficult and frustrating as you have forgotten what happened and how to account for it.

If the thought of doing your own paperwork is overwhelming, consider hiring a professional to help you, whether its ongoing or just to get you started.

Fred Lake
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