Tax Tips For The Self Employed

18 Jan Tax Tips For The Self Employed

TAX TIPS FOR THE SELF-EMPLOYED

Being self-employed has many advantages — the opportunity to be your own boss and come and go as you please, for example. However, it also comes with unique challenges, especially when it comes to how to handle taxes. Whether you’re running your own business or thinking about starting one, you’ll want to be aware of the specific tax rules and opportunities that apply to you.

Understand the self-employment tax:

When you worked for an employer, payroll taxes to fund Social Security and Medicare were split between you and your employer. Now you must pay a self-employment tax equal to the combined amount that an employee and employer would pay if you open a business as a sole-proprietor. You must pay this tax if you had net earnings of $400 or more from self-employment IN ADDITION TO the income tax.

The self-employment tax rate on net earnings (up to $127,200 in 2017) is 15.3%, with 12.4% going toward Social Security and 2.9% allotted to Medicare. Any amount over the earnings threshold is generally subject only to the Medicare payroll tax. However, self-employment and wage income above $200,000 is generally subject to a 0.9% additional Medicare tax. (For married individuals filing jointly, the 0.9% additional tax applies to combined self-employment and wage income over $250,000. For married individuals filing separately, the threshold is $125,000.)

If you file Form 1040, Schedule C, as a sole proprietor, independent contractor, or statutory employee, the net income listed on your Schedule C (or Schedule C-EZ) is self-employment income and must be included on Schedule SE, which is filed with your Form 1040. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed. You can deduct one-half of the self-employment tax paid (but not any portion of the Medicare surtax) when you compute the self-employment tax on Schedule SE.

Forming other entities (other than a sole proprietor) that are taxed as an S-Corporation may limit, and reduce, this self-employment tax on the profit in your business. However, you will still have to pay some amount of tax to Social Security by taking a ‘reasonable compensation’ to yourself as an officer (wage). Many factors must be considered specific to each business. You should consult with our team at Unbehagen Advisors to review the different entity options (Sole Proprietor, LLC, C-Corporation, S-Corporation) and how your business will benefit by choosing the right one that fits your specific needs.

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The information in this blog is current as of January, 2017. Your unique situation may be different, and the information may change with time. Consult a tax professional like Unbehagen to advise you on your specific situation. 1/18/2017