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This article was co-authored by Cassandra Lenfert, CPA, CFP®. Cassandra Lenfert is a Certified Public Accountant (CPA) and a Certified Financial Planner (CFP) in Colorado. She advises clients nationwide through her tax firm, Cassandra Lenfert, CPA, LLC. With over 15 years of tax, accounting, and personal finance experience, Cassandra specializes in working with individuals and small businesses on proactive tax planning to help them keep more money to reach their goals. She received her BA in Accounting from the University of Southern Indiana in 2006.
There are 20 references cited in this article, which can be found at the bottom of the page.
This article has been viewed 37,087 times.
Self-employment tax is the money owed to the government by any individual or small business owner whose net self-employment income in a given tax year was equal to or greater than $400.[1]Determining if you owe self-employment taxes isn't as simple as it may seem. There is a certain criteria you have to meet to be considered self-employed. Understanding the self-employment tax law and your status as a self-employed individual can help save you a lot of stress and money when you file your taxes.
Steps
Part 1
Part 1 of 3:
Determining Whether You Are Self-Employed
Learn who has to pay self-employment tax. If you work for yourself or own your own business, you may be required to pay a self-employment tax. The self-employment tax may apply to any individual who:- is the sole proprietor of an unincorporated business[2]
- is a member of a trade or business partnership[3]
- works as an independent contractor[4]
- owns or is part of a limited liability company (LLC)[5]
- earns income through rental property, including ownership of a trailer park or hotel property
- earns income through investments[6]
Assess whether you are in business for yourself. Any individual who works alone and owns their own business is considered self-employed. This includes any part-time businesses, such as a private "side job" performing services in addition to a regular job or business.[7] Anyone who is in business for themselves is required to pay self-employment taxes.[8]- An example of an individual in business for themselves would be a mechanic who is employed at a local repair shop but also offers side jobs from their home or garage.[9]
Determine if you are a sole proprietor. Any person who singlehandedly owns and operates an unincorporated business is considered a sole proprietor of that business, and must pay a self-employment tax.[10] In a sole proprietorship, the business and the business owner are concerned an indistinguishable entity.[11]- Sole proprietors do not file separate personal and business taxes, as there is no legal separation between the business and the individual.[12]
- Note that you can be both a sole proprietor and an independent contractor.
- Examples of a sole proprietor include a landscaper who works alone or employs a small crew to complete landscaping jobs; a self-employed technician who performs computer repairs, either from home or from a small commercial office; the owner of a small catering company; financial planners who work alone and are not part of a firm; and certain home healthcare workers.
Determine if you are an independent contractor. Anyone who works as a consultant or freelancer may be considered an independent contractor. An independent contractor is considered self-employed, as they work on projects for clients rather than working in a strictly employee/employer dynamic.[13] Independent contractors are required to pay their own federal income tax and self-employment tax, since clients do not withhold any taxes from an independent contractor's wages.[14]- Independent contractors are only paid for work that is performed, rather than receiving a general hourly salary, and are not eligible for employee benefits (including overtime pay or minimum wage salaries) or worker's compensation benefits.[15]
- You may be both an independent contractor and a sole proprietor.
- Examples of independent contractors include a writer, designer, or editor who works independently on projects, works from home, and sets their own hours; an individual who collects samples for a researcher but is not employed or on payroll with that researcher's laboratory; and an individual who is paid a predetermined sum of money to design and build a piece of equipment, where the individual sets their own hours and is only paid the agreed-upon sum of money regardless of how long it takes them to complete their task.[16]
Assess whether you are part of a trade/business partnership. A partnership is any working relationship between 2 or more individuals in which those individuals contribute money, property, skills, or labor to a trade or business and share in that business's financial profits and losses.[17] That trade or business does not necessarily need to be a full-time operation; a part-time business, for example, a "side job" in which individuals perform repairs or services, would be considered a self-employed business partnership.[18]- Any individual who is part of a trade or business partnership is required to pay self-employment taxes.[19]
- Examples of a trade or business partnership include a real estate office owned by 2 or more agents working at that office and 2 or more doctors who share office space.
Assess whether you receive rental income. Property owners who receive rental income, including income from owning hotels and trailer park property, must declare the net income from that property as taxable. Net income is determined in this case by subtracting all deductible expenses related to operating that property from the gross rent payments received.[20] However, most net rental income is considered passive income and is not subject to self-employment tax.- Some landlords who earn their living as full-time landlords, as well as part-time landlords engaged in other real estate practices, may be exempt from the self-employment tax.[21] If you're unsure whether you qualify for this exemption, it's best to speak with a tax return preparer.
Assess whether you receive investment income. Individuals who receive income from investments may be required to pay taxes on that income.[22] If you're unsure what your tax obligations are as an investor, you may want to consult with a tax return preparer.
Know whether you are part of a limited liability company. A limited liability company (LLC) provides the limited liabilities of a corporation with the tax structure of a partnership. An LLC can either have a single member or 2 or more members.[23] If you are a member of an LLC, you may be required to pay self-employment tax depending on the type of business you're operating and the type of participation, if any, you have in the LLC.Advertisement
Part 2
Part 2 of 3:
Meeting Your Self-Employed Tax Obligations
File an annual income return. Self-employed individuals are still required to file an annual income tax return, even though taxes were not withheld from the income received throughout the year. To do this, self-employed individuals must file either Schedule C (Form 1040), which reports profits and/or losses from a sole proprietorship business or single-member LLC that is not taxed as a corporation, or Schedule C-EZ (Form 1040), which reports net profits from a sole proprietorship business.[24] Both forms are available on the IRS website.
Pay your self-employment tax. Any individual earning $400 or more through self-employment is required to pay a tax on those earnings. The self-employment tax is usually applied to 92.35% of the individual's net earnings for the year.[25]
Make your quarterly payments. Self-employed individuals may be required to make quarterly payments that estimate the individual's Social Security, Medicare, and income taxes. These taxes are usually based off of an estimated tax, since the individual does not have these taxes withheld by an employer, as a salaried employee would.[26]- Estimated taxes for quarterly payments are determined by filling out Form 1040-ES, available on the IRS website.
- Estimated taxes generally must be paid by anyone expecting to owe $1,000 or more in tax, after subtracting withholdings and refundable credits.[27]
- Estimated taxes must be paid quarterly. Taxes for the period of January 1 to March 31 must be paid by April 15; taxes for the period of April 1 to May 31 must be paid by June 15; taxes for the period of June 1 to August 31 must be paid by September 15; and taxes for the period of September 1 to December 31 must be paid by January 15 of the following calendar year.[28]
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Part 3
Part 3 of 3:
Understanding Self-Employment Taxes
Learn what self-employment tax is. If you're self-employed, you are responsible for both the employer and employee portion of Social Security and Medicare tax. The employee portion is what is withheld from your salary if you are an employee of a business. The employer portion is the portion that the employer pays if you are an employee of a business.[29]- In 2019, the self-employment tax rate is 15.3%, of which 12.4% is applied to Social Security and 2.9% is applied to Medicare. The upper limit to the amount of income that is subject to the Social Security tax is $132,900 for 2019. There is no limit to the amount of income subject to Medicare tax.
Understand health insurance tax deductions. Self-employed individuals are permitted to deduct the cost of health insurance from their net taxable earnings when filing income taxes.[30] More information about the qualifications for self-employed health insurance tax deductions can be found in the Form 1040 Instructions, available on the IRS website.- Note that you can deduct the health insurance expenses from your income, not your self-employment taxes.
Consider hiring a tax return preparer. If you are a self-employed individual, you may want to speak with a tax return preparer who can help you ensure that you're paying all the required taxes and deducting all the qualifying deductibles from your return. There are a few things you should keep in mind, should you decide to hire a tax return preparer.- Check the preparer's qualifications. All paid tax return preparers are required to have a Preparer Tax Identification Number (PTIN). Make sure your preparer has a PTIN, and consider hiring a preparer who is affiliated with a professional organization.[31]
- Ask about service fees. Preparers who base their fees on a percentage of a client's refund may not be offering you the best possible services. Be similarly wary of preparers who promise to obtain a larger tax refund than other professional preparers, as these preparers may not be working ethically or legally.[32]
- As if the preparer offers electronic filing. Any professionally paid preparer who works with more than 10 clients each year must file those returns electronically. Any preparer who does not offer electronic filing may be lacking in experience or procedural knowledge.[33]
- Never sign a blank return. This is usually a sign of dishonesty and possible illegality.[34]
- Always review your return before you sign it. Ask any questions you may have about the return that your preparer has produced for you before you sign it, to ensure that there are no questionable entries or potentially fraudulent claims.[35]
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Expert Q&A
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- QuestionIf there is a loss from a business does a person still have to pay self-employment taxes?
Cassandra Lenfert, CPA, CFP®Cassandra Lenfert is a Certified Public Accountant (CPA) and a Certified Financial Planner (CFP) in Colorado. She advises clients nationwide through her tax firm, Cassandra Lenfert, CPA, LLC. With over 15 years of tax, accounting, and personal finance experience, Cassandra specializes in working with individuals and small businesses on proactive tax planning to help them keep more money to reach their goals. She received her BA in Accounting from the University of Southern Indiana in 2006.
Financial Advisor & Certified Public AccountantSelf-employment tax is imposed on net self-employment income (i.e. self-employment income minus self-employment deductions). If your business incurred a loss then you do not have net self-employment income and do not need to calculate and pay self-employment tax. - QuestionDo self-employment taxes end at age 75 or 80, or never?Cassandra Lenfert, CPA, CFP®Cassandra Lenfert is a Certified Public Accountant (CPA) and a Certified Financial Planner (CFP) in Colorado. She advises clients nationwide through her tax firm, Cassandra Lenfert, CPA, LLC. With over 15 years of tax, accounting, and personal finance experience, Cassandra specializes in working with individuals and small businesses on proactive tax planning to help them keep more money to reach their goals. She received her BA in Accounting from the University of Southern Indiana in 2006.
Financial Advisor & Certified Public AccountantThere is no upper age limit to self-employment tax. If you have net self-employment earnings of $400 or greater, you are subject to the tax.
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References
- ↑ http://www.investopedia.com/terms/s/selfemploymenttax.asp
- ↑ http://www.irs.gov/Individuals/Self-Employed#who
- ↑ http://www.irs.gov/Individuals/Self-Employed#who
- ↑ http://www.irs.gov/Individuals/Self-Employed#who
- ↑ http://www.irs.gov/Individuals/Self-Employed
- ↑ http://www.irs.gov/taxtopics/tc429.html
- ↑ https://www.irs.gov/businesses/small-businesses-self-employed/business-activities
- ↑ http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center
- ↑ https://www.irs.gov/businesses/small-businesses-self-employed/business-activities
- ↑ http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Sole-Proprietorships
- ↑ https://www.sba.gov/content/sole-proprietorship-0
- ↑ https://www.sba.gov/content/sole-proprietorship-0
- ↑ https://www.sba.gov/content/self-employed-independent-contractors
- ↑ https://www.sba.gov/content/self-employed-independent-contractors
- ↑ https://www.sba.gov/content/self-employed-independent-contractors
- ↑ https://procurement.ku.edu/independent-contractor-or-payroll-examples
- ↑ https://www.irs.gov/businesses/partnerships
- ↑ https://www.irs.gov/businesses/small-businesses-self-employed/business-activities
- ↑ http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center
- ↑ http://www.irs.gov/publications/p527/ch03.html
- ↑ http://www.irs.gov/publications/p527/ch03.html
- ↑ http://www.irs.gov/taxtopics/tc429.html
- ↑ https://www.sba.gov/content/limited-liability-company-llc
- ↑ http://www.irs.gov/Individuals/Self-Employed#AnnaulReturn
- ↑ http://www.irs.gov/taxtopics/tc554.html
- ↑ http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center#QuarterlyPayments
- ↑ http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes
- ↑ http://www.irs.gov/publications/p505/ch02.html#en_US_2015_publink1000194638
- ↑ http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employment-Tax-Social-Security-and-Medicare-Taxes
- ↑ http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employment-Tax-Social-Security-and-Medicare-Taxes
- ↑ http://www.irs.gov/uac/Tips-for-Choosing-a-Tax-Return-Preparer
- ↑ http://www.irs.gov/uac/Tips-for-Choosing-a-Tax-Return-Preparer
- ↑ http://www.irs.gov/uac/Tips-for-Choosing-a-Tax-Return-Preparer
- ↑ http://www.irs.gov/uac/Tips-for-Choosing-a-Tax-Return-Preparer
- ↑ http://www.irs.gov/uac/Tips-for-Choosing-a-Tax-Return-Preparer
About this article
Cassandra Lenfert, CPA, CFP®
Financial Advisor & Certified Public Accountant
This article was co-authored by Cassandra Lenfert, CPA, CFP®. Cassandra Lenfert is a Certified Public Accountant (CPA) and a Certified Financial Planner (CFP) in Colorado. She advises clients nationwide through her tax firm, Cassandra Lenfert, CPA, LLC. With over 15 years of tax, accounting, and personal finance experience, Cassandra specializes in working with individuals and small businesses on proactive tax planning to help them keep more money to reach their goals. She received her BA in Accounting from the University of Southern Indiana in 2006. This article has been viewed 37,087 times.
Co-authors: 7
Updated: January 31, 2023
Views: 37,087
Thanks to all authors for creating a page that has been read 37,087 times.
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