SelfEmployment Tax

This article addresses some of the key issues regarding self-employment tax. A careful reading of this material could make a big difference in how you think about self-employment tax. Who must pay self-employment tax and why? Well, if you're self-employed, you will be responsible for self-employment tax. How do you determine your liability? For the purpose of determining self-employment tax, you are self-employed if you are a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself. If you are a self-employed individual, you will have a Schedule C to attach to your Form 1040, and self-employment tax is computed on Form 1040, Schedule SE.

Individuals must pay self-employment tax is they have net earnings of $400 or more and there are several sources of net earnings that are used when figuring your self-employment tax liability. In most cases, net earnings include net profit from a farm or nonfarm business; if you operate more than one business, your net earnings from self-employment are the combined net earnings from all your businesses. The upside to operating more than one business: If you have a loss in one business, it reduces the income from another. self-employment tax is the self-employed individual's contribution to social security and Medicare taxes; the old-age taxes of employment. The only difference between the employee and the self-employed is the employee's social security and Medicare taxes are paid half by the employee and half by the employer, when an individual is self-employed; he/she is responsible for the entire amount.

There are alternative methods that can be used for figuring liability of self-employment tax and they are: The Farm Optional Method and the NonFarm Optional Method. These methods may qualify an individual to claim a larger Earned Income Credit or Child Tax Credit; they may also, however, increase your self-employment tax liability. The maximum amount of earnings subject to self-employment tax is currently $87,000.00. Now, when figuring your adjusted gross income on Form 1040, you may deduct up to one-half of your self-employment tax liability and if you are member of the ministry or clergy you may request an exemption from self-employment tax from the IRS.

It's really a good idea to probe a little deeper into the subject of self-employment tax. What you learn may give you the confidence you need to venture into new areas. When must self-employment taxes be paid? Generally, the self-employment taxes aren't due until the end of the year, when your personal tax return is filed.

Why is it this way? The self-employment tax isn't due until the end of the year simply because of the fact that many self-employed business owners don't file the net profit or net loss figures on their self-employment earnings, until the year's end. If there is a net loss, the self-employed individual receives a credit of self-employment tax due, in the amount of one-half of the amount due. The self-employment tax is the self-employed individual's equivalent to the social security and Medicare tax deducted from employee's paycheck each week. The wage earner's taxes are configured by their employer and are deducted on a weekly basis. The self-employed individual isn't required to make weekly payments of self-employment tax, but they are held liable for the full 15.3 rate, that is split between the employee and the employer in wage earning situations.

In general, however, if you expect to owe taxes in excess of $1000 for the year, you are required to pay estimated taxes each quarter. In summary, if you are self-employed, have net earnings of $400 or more, and file a tax return, you will be subject to self-employment tax. To learn more about individual liabilities, exemptions, and alternative tax methods, please visit the online site for IRS Forms and Publications at www.IRS.gov .

Topic 554, Publication 517 and 533 will provide more detailed and situation specific information. Of course, it's impossible to put everything about self-employment tax into just one article. But you can't deny that you've just added to your understanding about self-employment tax, and that's time well spent.

About the Author: Hans Hasselfors is the founder of http://www.SubmitYourNewArticle.com. You may find varied self-employment tax articles in our article directory.