Self-Employment Tax: Social Security & Medicare Filing

Self-employment has many advantages, but the tax obligations may be difficult. If you are self-employed, learn how to submit your Social Security and Medicare taxes.

What you’ll discover:

What are the standard withholdings and tax rates?
How can I figure out how much tax I owe?
How should I pay my taxes?
Obtaining More Assistance

Self-employment has many advantages, like freedom and flexibility, but it also has certain drawbacks. One of the difficulties is that you are alone accountable for all of your taxes. If you work for someone else, the employer deducts Social Security and Medicare taxes from your paycheck so you don’t have to pay them separately. If you are self-employed—whether as an independent contractor, a partner, or a firm owner, even if just part-time—the IRS requires you to pay Social Security and Medicare directly to them.

What are the standard withholdings and tax rates?

Employers typically contribute 6.2 percent of your earnings (up to a limit) to Social Security and 1.45 percent to Medicare. You pay an extra 6.2 percent of Social Security tax plus 1.45 percent of your salary for Medicare via withholdings. In most cases, your company will remove these amounts from your salary and send them to the government together with its own contribution.

When you work for yourself, however, the duty of paying—as well as paying the whole amount of taxes—falls solely on your shoulders. Now, you must pay 12.4 percent of your income for Social Security and 2.9 percent for Medicaid. If you make more than $200,000 as a single taxpayer or $250,000 as a married taxpayer filing jointly, you must pay an additional 0.9 percent for Medicare. None of these taxes are generally considered deductible from your total company expense. This is the self-employment tax, and it excludes federal and state income taxes.

How can I figure out how much tax I owe?

The amount you must withhold for self-employment tax is not determined by your gross profit. Rather, it is determined by your net profit (or net loss). To calculate this, you must reduce your business costs from your company income. You have a net profit if your costs do not exceed your revenue. The exact amount of tax payable may then be calculated using Form 1040.

But, if your costs surpass your earnings, you have a net loss. In most cases, the losses may be deducted from gross income, and the self-employment tax is computed using the same method. Yet, in certain cases, the government restricts the deductibility of losses. Schedule C must be completed to see if you are eligible to deduct a net loss.

In rare cases, you may carry over a nondeductible loss to next year, when it may be deductible. You must first check Publication 536 to see whether you are qualified to do so.

Nonprofit organizations are the only exemption to the net loss deduction rules. The IRS currently does not limit the deductions that organizations may take, nor does it restrict net loss applications for nonprofits, as long as the organization follows established business norms for its industry.

Carryovers may be tricky, so consult with a tax specialist if you have any issues.

How should I pay my taxes?

Since you are self-employed, you must pay estimated taxes each quarter in addition to submitting your yearly return. Your quarterly projected tax payments should contain amounts to meet both your Social Security and Medicare tax responsibilities, as well as your expected income tax bill. You may use the prior year’s return to estimate the taxes payable; as long as you pay estimated taxes that are at least equal to your previous year’s tax liability, you should not face any penalties. Form 1040ES—Estimated Tax for Persons is used to submit estimated taxes. This form contains vouchers that you may print and send in to make anticipated tax payments throughout the year. You may also pay your taxes online using the IRS’s Electronic Federal Tax Payment System.

As the year passes, you must ensure that your actual profits correspond to the estimates you made in calculating your expected tax liability. If you make less than you expected and hence overpay projected taxes, the government normally wants you to continue making the payments as planned. But, if you earn much more than you expected, you must create plans to make up the gap as quickly as feasible. Even if you make quarterly payments, you may be punished if you pay less than 90% of the current year’s profits and less than 100% of the previous year’s earnings.

If you are self-employed, you must submit a Schedule C with your Form 1040 each year. Schedule C is where you disclose your company’s profits and expenditures, as well as determine your net profit or loss. You’ll also add your projected tax payments on the Form 1040, subtracting these from your overall tax liability to compute any leftover tax payable. This sum, together with your tax forms, should be delivered by the April 15th individual filing deadline, or the following Monday if the deadline occurs on a weekend.

As a general guideline, save your self-employment tax and any other projected taxes as soon as you get any company revenue. This eliminates the need for you to come up with a substantial cash to make your quarterly and yearly payments.

Obtaining More Assistance

Just because you own your own company, it doesn’t mean you have to do it alone. If you need assistance with your self-employment taxes or want to learn if incorporating might lower your tax obligation, please contact us.