Congratulations! You have decided to become your own boss, an entrepreneur! Or maybe, you have been doing this for a minute. Either way at some point in this journey you may one day share the same expression of horror as our friend, shown sitting at the computer. What’s the problem? SELF-EMPLOYMENT TAXES! In this brief document, I will share some insight on this tax type, and some steps you can take to tackle this monster head on. After all, you are now a business owner…you got this!

The tax system is a pay-as-you-earn system.  Any money that gets taken out in any given tax year goes toward paying your tax bill when you file your tax return. If you have ever worked for an employer, you will see this on your stub as Federal or State Taxes Withheld, as well as a portion for Medicare and Social Security. Note: The last two make up what is known as Self-Employment Tax.  You and your employer equally paid this tax 50/50. But now…it’s all you: 12.4% Social Security, 2.9% Medicare!

As folks at Gusto.com remind us, this is the “salt and pepper” on top of what the IRS taxes you on your income. So, after you have digested that, take a deep breath and see what can be done to make this go down easier. ☺  First of all, you may wonder if this particular tax applies to you. Well, according to the IRS, if any of the following apply to you then you are required to pay self-employment taxes (Source: IRS.GOV):

• If you have Net Income or Net Earnings (means sales minus business expenses) for tax year that is over $400, you must pay.
• If you are an Independent Contractor or Freelancer who has earned $1000 and also have a full-time job, you must pay.
• If you are part of a partnership that carries on a business, then you must pay.

Note: Age does not matter, even if you are old enough to draw Social Security!

So, now that you know that we are all pretty much in the same boat, let’s go over a few more things.

HOW DO I FIGURE OUT SELF EMPLOYMENT TAX BEFORE TAX TIME?

You must start with your Net Income (Sales minus Business Expenses) for the month, quarter, or year.  For example, let’s say you earned $50,000 for the year.  You must:

1. Multiply that $50,000 by .9235 which will come out to $46,175 (no this is not your bill! It is your taxable income).  Also, according to Payroll Provider Gusto.com they use .9235% because you take 7.65% of your self- employment tax bill as a DEDCUTION on your taxes.
2. Take your taxable income or in this case $46,175 x 15.3% which gives you self- employment taxes of $7,064.77.

HOW DO I MAKE SURE I CAN PAY THIS WHEN TAX TIME ROLLS AROUND?

• Put money for taxes in a separate savings account every time you get paid or once a month (minimally). If money is very tight or you are just starting out, begin by saving 10-15% of your net income.  However, experts suggest saving 30-50% of your net income. MOST IMPORTANT OF ALL: DO NOT TOUCH THE MONEY ONCE IT IS IN SAVINGS!
• The 30-50% is to be reserved to cover both the Self-Employment Tax (remember, that is 15.3%), and the regular income tax.
• If your Self-Employment Tax is $1000 or more, you need to submit estimated tax payments every three months (quarterly) to the IRS. This takes away the sticker shock at tax time since you have already begun to pay on your tax bill ahead of time. Please see 2018 schedule below:
  • Jan through March 31, 2018; due April 17, 2018
  • April through May 31, 2018; due June 15, 2018
  • June through August 31, 2018; due Sept 17, 2018
  • September through Dec 3, 2018; due January 15, 2019

WHAT HAPPENS IF I DID NOT PUT ASIDE ENOUGH?

• You may have to pay an underpayment penalty at tax time. But, at least if you pay into the system, the same as you owed in prior year, they won’t charge this under the Safe Harbor Rule.
• Don’t panic, just make payment arrangements with IRS and State (if you owe them too).
• See a Financial Advisor and inquire about a Self-Employment IRA (SEP); it may reduce your taxes.

“And if God cares so wonderfully for wildflowers that are here today and thrown into the fire tomorrow, he will certainly care for you. Why do you have so little faith?”  (Mt. 6:30, NLT)