What You Might Not Know About Self Employment Taxes
by Joe Wallace
It’s nowhere near April 15th, so why am I writing about tax issues for freelancers now? Because if you track your figures all through the year, you’ll know when you might need to take a deduction or how much to contribute to your SEP IRA by the end of the contribution period to avoid a nasty surprise on your income taxes for next year.
Didn’t know you could do that? Then you probably don’t know about these little issues, either…lucky for you we’re watching your financial back, eh? Don’t take any of this as advice from US, this information comes directly from the IRS official site:
Self-employment taxes break down like this: self-employed people pay 15.3% until your income pushes you into a higher bracket. The rate is in two parts–you pay 12.4% for social security plus 2.9% for Medicare.
Did you know you can deduct half your self-employment tax for the purpose of figuring your adjusted gross income? But you can ONLY take that deduction from your income tax, not your Self Employed tax. Are you confused yet?
Who pays Self Employment tax? Anybody who earns more than $400 from self employment activities. Also, any church employee who earned more than $108.28 must also pay SE tax.
The IRS says you are self employed even if you don’t have a full-time business. Part time business owners who have a regular job may also have to pay self-employment taxes. All of this adds up to a very tricky landscape for new freelancers. If I could give ANY tax advice at all, it would be that you seriously consider consulting an experienced tax professional and get some answers to your burning tax questions long before it is time to file your income taxes.
Asking questions NOW, long before April 15th and you can plan your business deductions, self-employed retirement saving and other critical freelance finance issues for maximum effectiveness. Plan ahead for tax time and you’ll shed no tears when it’s time to file.
The self-employment tax is one of the rude awakenings of freelance life, but you’re right to bring it up in the offseason rather than waiting for the scramble when it’s too late.
Freelancers should be aware that next year there could be extra scrutiny by the IRS on “microbusiness tax compliance” according to the National Association for the Self Employed (http://www.nase.org): “stepping up the search for noncompliant taxpayers [is] one method for offsetting a massive budget designed to help shore up economic losses for the nation.”
So, make sure you’re keeping your records in top shape while you’re saving up money to pay Uncle Sam.