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Self-Employment Taxes: What it Entails

Self-Employment Taxes: What it Entails

There is no known trick or formula developed to dodge payment of taxes to Uncle Sam, and if you want to avoid the headache of an audit, you have to get it right. Employees enjoy the advantage of having their taxes automatically deducted from the wages. It is your responsibility, as a self employed individual to ensure you know what you owe and pay as soon as possible. 

Since there is no automatic deduction of taxes, self-employed individuals usually have a higher income compared to W2 employees. If you, however, do not want a visit from the IRS, you are better off setting some of those funds aside to fulfill your tax obligations. 

Paying taxes, however, could be a complicated task as those funds are overwhelming, and learning the intricacies of the US tax system could be intimidating. As a result, this article shed light on basic things one needs to know when filing as a self-employed. 


Self-employment taxes: Basics of Filing 

One of the essential steps in determining the tax obligation is to know the tax rate and decide whether you will have to pay separate tax for your region. You need your net business profit or loss in figuring out your rate. When you subtract your business expenses from the income, it will give you the required value. For expenses less than the income, the difference gives the net profit, which is considered income. For expenses more than income, the contrast provides the net loss. 

If you earn above $400 from your self-employment business, it is compulsory to file Form 1040 (Schedule C). Should your net earnings be below $400 from the self-employment business, filing a return is mandatory as long as you meet other requirements listed here.

Uncle Sam specifies that self-employed individuals who will owe above $1,000 in their tax should pay an estimated tax payment four times a year. In filing these quarterly taxes, Form 1040 is essential. 


Calculating Your Self-Employment Tax is Important 

For the current year 2021, the self-employment tax rate is fixed at 15.3%. This takes care of the 2.9% Medicare taxes and the 12.4% Social Security taxes. For 2021, only $142,800 of your income is subjected to social security taxes. There is, however, a 0.9% additional Medicare tax if your entire earning is more than $250,000 for joint filers and $200,000 for single filers. 

Your net self-employment earning (the self-employment gross income less the business expenses) for the entire year is essential in estimating your self-employment tax. As a rule, up to 92.35% of your self-employment earnings can be taxed. As long as you have the total net earnings from your self-employment that can be taxed, use the 15.3% to estimate the self-employment tax. 

If you had a little income or loss from self-employment for the year, there are some options available from the IRS to calculate your options.

Different Method of Filing Your Taxes 

Quarterly Payments

Form 1040-ES (Estimated Taxes for Individuals) is the correct Form for people who will make quarterly estimated tax payments. There is a worksheet in it that resembles what is available in Form 1040. Taxpayers will, however, need the previous year's return in filling this Form. 

Form 1040-ES comes with some blank vouchers with which taxpayers can mail their estimated tax payments. There is also the opportunity to make payments online with the Electronic Federal Tax Payment System. People who are just starting their self-employment journey need an approximate value of what they project to earn in the year. Readers can consult a tax professional for more on this.


Annual Returns 

In filing an annual return, one needs to report the income or loss from the self-employed business you did. Form 1040 (Schedule SE, Self employment tax) is ideal for filing and reporting Medicare and Social Security taxes.

You can estimate the value of Medicare and Social Security taxes you owe in a year using the loss of income you estimated on Schedule C.


FOR MORE INFORMATION OR TO SEE HOW UNIVERSAL ACCOUNTING & FINANCIAL SERVICES, INC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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