Know Your Self-Employment Tax Obligation

Even if you are working for yourself, you remain bound to pay taxes just like when you were still working for an employer. As a self-employed person, you are now left on your own to fulfill that obligation.

Learn from our guide some information that can help you understand what tax payment for self-employed persons is all about.

If you have decided to quit working for an employer and choose to work for yourself, one of the many things you may have to deal with under your new work setup is to pay self-employment tax. That is, if you are a sole proprietor, or an independent contractor (a dentist, lawyer or auctioneer or someone who offers services to the public) and has a net earnings from self-employment of at least $400. You pay self-employment tax as you pay federal income tax.

Calculating Self-employment Tax

Self-employment tax is tax for social security and Medicare, which when we you were still employed, was withheld by your employer. Before, your employer used to calculate taxes for social security and Medicare for you. Now it should be you who should figure that out by determining net earnings from self-employment using Schedule SE (Form 1040). You may also use other forms, to see what other forms you can use, visit the IRS website. Net earnings from self-employment is your total earnings that is subject to self-employment tax. You would have to pay self-employment tax if your net earnings from self-employment is at least $400. Self-employment tax has a rate of 15.3%, which is the total of 12.4% for social security and 2.9% for Medicare. Only part of your income is subject to the social security tax, but all of it is subject to Medicare tax. It is the first $102,000 of income for 2008.

Schedule of Paying Self-employment Tax

Because you no longer have an employee who can withhold taxes for Social Security and Medicare, it is you who should put money aside for this tax. See Form 1040-ES on how to estimate that amount. This part is crucial because wrong estimates could lead to penalties even if you are willing to pay the whole amount at the end of the year. And the government requires that self-employed individuals pay several times within the year and don't wait for April 15 to settle their tax dues. If you think you will have to pay $1,000 or more, including self-employment tax, when you file your return, then you must have to make estimated tax payments. If you have made payments the previous year, you could also base your current year tax estimates on at least the same amount of the tax you paid the previous year.

The self-employment tax payments are scheduled quarterly at certain fixed dates beginning on April 15. The next scheduled payment is the 15th of June, September and January (or the first business day after the 15th). But that depends on whether you earned money for those periods; if not, you can skip payment for that tax due date. You fill up IRS Form 1040-ES when filing federal estimated taxes.

For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

You need to have a Social Security Number or an individual taxpayer identification number in order for you to pay your self-employment tax. The Social Security Number may be obtained from any Social Security office. If you are not eligible for an SSN, you should get an ITIN from the Internal Revenue Service.


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