This article will show you how to calculate your taxes for self-employed people, including the rate you should use and the deductions that you can take advantage of. It won’t seem so bad once you have completed reading, calculating, and paying your taxes.
What is the Self-Employed Tax?
Your boss will pay your quarterly taxes, as well as your Medicare and social security taxes, referred to as FICA tax. Your employer must match the 7.65% percentage you pay. If you are self-employed, all taxes must be paid.
What tax rate applies to self-employed workers?
The current tax rate is 15.3% (12.4% for social security, and 2.9% for Medicare). The IRS requires you to pay this tax on wages, tips, and net earnings of $ 132900 or more in 2019. This tax was increased to $ 137,000. in 2020.
Who is responsible for self-employment taxes?
These types of taxes are paid by transfer entities such as sole proprietorships and partnerships, S corporations, and owners of limited liability businesses. This is because the profits and losses are carried over to tax returns. This tax is not payable by shareholders of corporations, as they are not self-employed.
Self-employment tax is required for tax entities that meet the IRS criteria.
- Earnings from self-employment are at least $ 400 (excluding those earned by church workers).
- Workers in the church whose income is $ 108.28 and more
IRS regulations state that self-employed tax rules are applicable regardless of whether you are receiving Medicare or Social Security benefits.
1. What do you need?
You will need a social security number to pay your self-employment taxes.
2. Taxable earnings
Next, you will need to calculate your taxable earnings by subtracting expenses from your gross earnings. Your earnings must meet IRS standards, as I have mentioned.
You don’t owe taxes if your business is losing. This sounds great, but you won’t be eligible to contribute to Medicare or social security in years where you don’t report income. This could lower your social security taxes once you retire. You should know how to file your taxes.
3. Calculate your self-employment tax
Next, multiply your taxable earnings by 92.35%.
If your annual earnings are $50,000, you can multiply this number by 46,175. The self-employed tax rate of 15.3% must be added to this amount.
This example would show that your tax rate is $ 7,065.
4. Please fill out the form with your calculated amount
As you fill out IRS form 1040, please use the same example as the one before.
5. Your self-employment tax must be paid
The IRS doesn’t have a form for self-employment taxes. Therefore, employers must submit their taxes together with their estimated tax payments.
Use steps 2 and 3 to estimate your quarterly taxes.
The IRS expects that you pay at least 90% of your federal taxes and self-employment taxes. You will be fined if you fail to do so.
What tax deductions are available to self-employed taxpayers?
- You will see that the SE form does not require you to multiply your taxable earnings more than 100%. Instead, you can multiply them by 92.35%. You can deduct 7.65% from your self-employment tax, which is half of the 15.3%.
- You can also use the SE form to deduct 50% of your total tax as an adjustment to your taxable earnings.
While this deduction doesn’t reduce your total tax owed, it reduces the amount of taxable income that you owe federal taxes.
To reduce your adjusted gross, you can enter half of the $ 7,065 tax owed in the above example.
You can reduce your taxable income by taking regular deductions. However, your adjusted gross income can be reduced by deducting premiums for your health insurance on behalf of your legal spouse and dependents. The self-employment tax that you owe is not reduced by this health insurance deduction.
Taxes are now much easier
Understanding the IRS regulations will help you to reduce stress and allow you to focus on what is important: your business. Another way to keep your business a success is to calculate and pay your taxes on time.