Understanding Self-employment Taxes

January 27, 2011 at 11:26 pm (Business Taxes)

All self-employed individuals who have earned income of $400 or more are required to pay self-employment tax. This tax covers your Social Security and Medicare payments that your employer would normally cover if you were an employee.

You figure and file your SE tax on Schedule SE along with your 1040 form. The rate at the moment is 15.3%. This is split into two parts, 12.4% for social security and 2.9% for Medicare (hospital insurance). It is important to note that he SE tax rules apply no matter how old you are and even if you are already receiving social Security or Medicare payments.

It is possible to get a Self-employment tax deduction. You can deduct half of your SE tax when you calculate your adjusted gross income. This deduction only affects your income tax however; it does not affect either your net earnings from self-employment or your Self-Employment tax.

When do you pay your Self-Employment taxes? Well, our system is a pay-as-you go or pay-as-you-earn. This means that you pay your taxes as you acquire income throughout the year. If you expect to owe $1000 or more in taxes, including SE taxes, then you must pay quarterly estimated tax payments in relation to the income you receive during the year. It is important to understand well the concept of this tax and when and how much you need to pay so that you won’t find yourself with a hefty penalty when you file your next tax return


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