IRS Self employment tax form.  Schedule SE

It’s a phrase I hear several times a year once I mention Self Employment Tax.   Unfortunately there are only one of two categories that you can fall in to for earned income on your taxes.  Either you’re an employee or you are a business owner.  Though there are actually lots of people who get a 1099 that are improperly classified as independent contractors when they should be employees, but that’s a much longer discussion.

If you work and you get a 1099 at the end of the year, you are considered a business owner and subject to Self Employment tax.  Unfortunately there’s no way around this.  Self Employment tax is misunderstood by a lot of people though.  I’ve worked with people who’ve assumed it was punitive.  It’s not, but if you’re not prepared for it, it can definitely feel like it is.  A lot of small business owners, and independent contractors, actually wind up paying more in Self Employment tax each year than their actual income tax.  It winds up being approximately 15.3% of the profit from your business.  If that’s something you’re not prepared for it can be a big hit, but what is it?

As an employee of a company you pay 6.2% of your income to Social Security and another 1.45% to Medicare.  You may see these combined and listed as FICA.  In addition to that your employer also has to match.  So, if you combine the two you get 15.3%.  Self Employment tax is not an extra tax you have to pay for being self-employed, it’s you paying in to Social Security and Medicare. Now as an employee you only had to pay half of that amount.  Unfortunately being an INDEPENDENT Contractor means there’s no one else to pay the other half for you.  Seeing as how the good people at the IRS are so generous they do at least let you take a deduction for half of what your SE tax is.

If you need help planning for your upcoming tax bill call or email us today to schedule a free tax planning session.
Vector Tax & Accounting
73 Old County Rd
Windsor Locks, CT 06096