Entrepreneur, freelancer, independent contractor or self-employed. However you title yourself, chances are you answer to one boss – yourself!
Working for yourself can be exciting and lucrative. But when you’re no longer an employee, some aspects of your work life can be confusing, especially when it comes to taxes.
This month we ask the question: How does filing self-employment taxes differ from filing as a W-2 employee?
What Are Self Employment Taxes?
These are similar to the taxes that an employee who works under an employer would have withheld from their wages to go towards Social Security (retirement, disability, and survivorship benefits), and Medicare (healthcare for disabled citizens and the elderly). As a self-employed individual you’ll need to file an annual return and pay your estimated taxes quarterly.
Do YOU Have to Pay Self Employment Taxes?
If you do not work under an employer, and are making $400 or more in net earnings then yes, you will be required to pay this tax. This tax applies to you even if you are already receiving Social Security or Medicare, and does not have an age limit.
Why Pay Them?
No one really enjoys paying taxes, but they play an important part in our country’s economic growth. Taxes are collected to fund programs that provide health, education and infrastructure services both locally and at the federal level.
Of course, you shouldn’t have to hand over more of your hard-earned money than is fair. Working with a tax specialist is a great way to make sure you’re staying on top of your books in the most accurate and effective way, which translates to not paying more in taxes than required.
How Much Will I Be Paying?
The self-employment tax rate is currently 15.3%. This can be broken down as the sum of 2.9% for Medicare and 12.4% for Social Security. You will be taxed for Medicare based on your entire net earnings, and for Social Security on your net earnings up to $147,000.
If your net earnings exceed $147,000, any amount after that is Social Security tax-free!
Why Does this Tax Rate Seem So High?
In comparison to W-2 workers (those who work under an employer) who at the current tax rate pay 6.2% towards Social Security, and 1.45% towards Medicare for a total of 7.6%; self-employed persons will find that they are paying a larger amount towards these taxes, and you may be wondering why.
In a nutshell, the IRS views persons who are self-employed as both the employer and the employee, leaving the full responsibility of the 15.3% tax rate to the self-employed individual.
What’s Your Next Step?
You can whip out your scratch pad and calculator, and set aside multiple hours of your valuable time trying to take on the task of figuring everything out on your own. Or you can save yourself the stress and potential frustration by hiring a tax professional! Our clients know when they hand over their tax information to us that it’s one less task on their plate, and it will get done correctly the first time.
Contact us today to discuss your options!