Today many people work as someone else’s employees and also as independent or self-employed contractors. A common reason is to work that second job in the sharing economy, travel with a company like Uber, or rent a house through Airbnb. But if you have these two sources of income, it means two types of payroll taxes. So in this article, we will discuss how to pay tax for self employed income.
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Payment of self-employment taxes
Self-employment and earning a wage or salary from employment affects your Social Security and Medicare eligibility and your total self-employment tax. You are self-employed if you are making money in your own business, as an independent, independent contractor, sole proprietor, partnership partner, or as a member of an LLC or S corporation. If you have a corporation, you are not a self-employed worker.
If you are self-employed, you pay self-employment tax (SECA) based on your net income (profit) from your business. You pay this tax at a rate of 12.6 percent of that income. So you don’t have to pay this tax as you go, as you don’t have to withhold it from your business income. You do not receive a paycheck from your company because you are not an employee. This tax is not calculated until your net business income is determined at the time of tax. Schedule SE is the form used to calculate self-employment tax.
What it means to be autonomous
A self-employed person may be someone who runs a business as a sole proprietor, LLC owner, or partner in a partnership. You may not have a formal business structure, but file your business taxes on Schedule C with your personal tax return.
The IRS says you are self-employed if:
You start an operation or business as a sole proprietor or as an independent contractor.
You are a member of a company that carries out a commercial or commercial activity.
Otherwise, you are doing business on your own (even part time)
That is, if you are in business to earn money, you are considered a self-employed person.
Example of calculating self-employment taxes
Let’s say you earned $ 50,000 from employment and $ 30,000 from net income from self-employment in 2016. Your total of $ 80,000 of your salary and self-employment is less than the Social Security maximum of $ 117,000, so your Social Security tax due on all your income.
Let’s say $ 3,100 in FICA taxes was withheld from your payment. You are also owed approximately $ 3,720 as self-employment tax on your $ 30,000 in self-employment income. (The calculation becomes a little trivial here; this may not be exact, depending on your specific situation.)
The $ 3,720 owed to you as self-employment tax is included on Line 27 of your personal form 1040, and included with any income tax owed to you to determine your total tax bill for the year. If your income from employment and self-employment exceeds the maximum Social Security limit, you still have to pay Medicare tax. There is no limit to the Medicare tax, and you may be required to pay an additional Medicare tax of 2.9 percent if your income exceeds a certain amount.
Speak with a local accountant in your area to help you with your tax return and tax calculations.
How to pay your self-employment tax
Because self-employment tax is not withheld, you could face a large tax bill at the time of tax payment. Many business owners make estimated quarterly payments, including estimated amounts of self-employment tax, as well as estimated income tax. You can increase your federal and state income tax withholding from your job to cover this additional cost.
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