Understanding How Self-Employment Taxes Are Calculated

Entrepreneurs are the lifeblood of our economy, but one of the biggest hurdles involved in successful self-employment is figuring out how to properly manage your taxes. If your net profits from self-employment—whether as a sole-proprietor, independent contractor, or member of a partnership—total $400 or more in a given year, you will be required to pay self-employment taxes.

Taxes tend to be stressful for everyone, whether you run a major corporation or you are simply paying your personal income taxes, so requiring individuals who are entering into business for themselves and are not used to being in charge of their own business taxes and deductions can take that stress to unprecedented levels.

However, you can empower yourself and your business with knowledge by better understanding how the self-employment tax is calculated and how it works. The self-employment tax is simply a tax that is added on top of your normal income tax.

It is not a “penalty” for building a business on your own—it simply replaces the Social Security and Medicare taxes that are withheld when you are employed by a company. The difference is, your employer would normally share half of the burden for paying the required withholding, and when you are self-employed you must shoulder the full amount. The same amount of Social Security and Medicare tax will still be paid.

The self-employment tax is calculated at 15.3% of your net-earnings from self-employment (12.4% for Social Security, and 2.9% for Medicare). Your net earnings are your total revenues minus your business expenses. Fortunately, you are allowed to deduct the “employer’s” half of your total self-employment taxes as an above-the-line deduction on your 1040 tax form prior to arriving at an adjusted gross income, so you will be able to get some of it back. Business expense deductions (or Schedule C deductions) also become essential to your taxes as they directly affect your taxable income.

You need to keep accurate records of all your business expenses in order to arrive at a fair figure for net earnings that will be subject to the self-employment tax.

There is a limit on the taxable self-employment income with regard to social security. In 2015, only your first $118,500 will be subject to the 12.4% social security tax. However, all of your net earnings are subject to the 2.9% Medicare tax.

If you are self-employed and need help with bookkeeping or filing your taxes, please contact Desnoyers CPA and let us work to ensure you only pay exactly what you are required to when it comes to your self-employment taxes.

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Written by Desnoyers CPA

Desnoyers CPA

Known for her friendly, outgoing nature and her rare talent for financial foresight, Lydia Desnoyers has been serving individuals and small businesses in Florida since 2010. After earning her Master’s Degree in Accounting from Nova Southeastern University and her Bachelor’s Degree in Accounting from Florida State University, she became a Certified Public Accountant and a Certified Fraud Examiner.