Last time, we talked about how much money to set aside for your taxes which sparked a great discussion on Facebook. Many people working from home as an Independent Contractor do not realize us self-employed pay more taxes than we would as an employee! Now don’t get too upset, you also get more write-offs to help counter this and the additional tax is also a deduction! Lets dig into this a little deeper so you understand what it means to be self-employed at tax time!
What is Self-Employment Tax?
When you are an employee, you pay your usual Federal, State and Local taxes and then you and your employer split the medicare and social security tax. Therefore, if you are self-employed, you are responsible for both the employer and employee side of the medicare and social security taxes.
How Much is Self-Employment Tax?
The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011. The tax rate is currently 13.3% (10.4% for Social Security and 2.9% for Medicare). However, there are some limits and thresholds that can also alter this number.
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[2013 UPDATE: Due to the end of the Tax Relief Act the Self Employment tax rate is expected to be 15.3% this year-source]
[2012 UPDATE: “The Temporary Payroll Tax Cut Continuation Act of 2011 extended the self-employment tax reduction of 2% for calendar year 2012 so the rates for 2011 remain in effect for 2012.” according to the IRS]
You must earn at least $400 AFTER your deductions (net earnings). Anything under $400 and you do not have to worry about SE taxes!
If you earn at least $106,800 (congrats), any additional income over that will not be subject to the Social Security tax. (I am trying my HARDEST not to begin ranting right about now!- no one encourage me! haha)
Reminder: These numbers are subject to change. The Tax Relief Act of 2010 is currently set to expire the end of 2012.
You Can Deduct Part of Your Self-Employment Taxes!
You can deduct half of your self-employment tax! Understand this deduction only affects your income taxes and not your net earnings or your self-employment tax.
Also, thanks to being Self-Employed, you have a lot more deductions than an Employee would receive. This helps counter your SE Tax!
Want a general idea of how much Self-Employment Tax you will owe?
Check out this handy calculator that will figure it up automatically. Remember, this is only SE taxes and does not include any Federal, State or Local taxes!
For more information visit the 2011 Self-Employment IRS Page
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