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
I’ve always said that if you want to really get to know someone, do their taxes. Most people don’t view it as that big of a deal, but others view it as a very personal experience. After I’ve worked with someone I know who they are, where they live, where they work. I’ll know if they have kids, are in school, are they saving for retirement, and may other factors that tell me what their life is like and what kind of person they are. One other thing that comes up commonly is, do they donate to any charities.
Donating to a good cause is a great thing that lots of people do every year. Many people are able to take advantage of the tax benefits of donations, but not everyone can. In an earlier posts I talked about some common misconceptions about the tax benefits of donations. Just because you donate something doesn’t automatically mean that you get a tax break for it. To be honest, if you’re making a donation just for the tax deduction, you’re doing it for the wrong reason.
I work with a lot of new business owners. One common thing that gets brought up is donating a free consultation, evaluation, portrait session, etc. Some people just legitimately want to help the organization out by donating this service, others want to help out but also view it as a form of advertising. Either one is a perfectly fine reason for making a donation. The problem comes when they think they can deduct the full market value of the donated service. When it comes to donating your time, your hourly “billing” rate is $0. While you’ve done a wonderful thing, your time has 0 in the way of deductible value. That’s not to say that you can’t take any deduction for your donated service. You can deduct your actual costs. So any supplies that you needed to purchase for this, as well as your mileage, are all deductible, but that’s it…Sorry.
For artists, the majority of the time, it’s going to be exactly the same as I described above. However, there are some rules regarding the donation of intellectual property and finished works of art that may apply. Though that’s too involved of a discussion for a format like this.