Category Archives: Self Employed

Self-Employment Tax 101 for Small Business Owners

When you’ve made the transition from working for someone else to being your own boss, you gain the freedom to create your own professional path. You also get additional responsibilities, like paying self-employment tax.  

Self-employed individuals are required to not only submit the income tax they owe to the federal, state, and local governments, they must also submit self-employment tax to the IRS. 

Who Is a “Self-Employed Individual”?

The IRS defines a self-employed individual as someone who conducts business as a sole proprietor, independent contractor, member of a partnership, or as someone who otherwise is in business for herself or himself. 

What is Self-Employment Tax?

According to IRS.gov, “Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.”

Employees of a company pay half of their Social Security and Medicare taxes (usually withheld from their wages) and the employer pays the other half. However, as a self-employed individual, a business owner must remit the entire amount. 

Most self-employed persons, because their tax typically isn’t withheld from paychecks, must estimate their self-employment and income tax amounts due and pay them on a quarterly basis. 

Similar to the FICA tax that wage earners working for employers pay, the self-employment tax rate for tax year 2018 is 15.3 percent on the individual’s first $128,400 of net income and then 2.9 percent on net income beyond that. The rate consists of two parts: 12.4 percent for social security and 2.9 percent for Medicare. 

To pay self-employment tax, you must have a Social Security number or an individual taxpayer identification number. Schedule SE (Form 1040) can be used to calculate self-employment tax. 

Self-employed individuals can deduct the employer-equivalent portion (half of the total self-employment tax) in computing their business’s adjusted gross income, reducing the business income subject to income tax.

Tips for Staying on Track with Your Self-Employment Tax

Neglecting to pay your taxes can result in fines and penalties, so it’s critical to stay current. Talk with an accountant and/or tax professional for assistance in understanding your tax obligations. This is especially important with the new tax laws in effect for 2018.

Here are some additional tips for consideration:

And always remember, a SCORE mentor can help you navigate the uncharted territory of being self-employed. You are invited to ask for guidance on all aspects of starting and running your business.

Ask SCORE: How can I win in the gig economy?

The “gig economy” — the market for individuals providing services or working on projects on a freelance on-demand or short-term contract basis — has been a growing trend. While there are no official gig economy statistics available to measure its prominence, we can make some assumptions about its increasing popularity based on other available data. 

According to information reported by the United States Census Bureau, the number of non-employer businesses, the group of individuals most likely to work on gig basis,  was 24,331,403 in 2015. That’s 10% more than the 22,110,628 non-employer businesses in 2010.

And opportunity abounds for independent professionals who take on gig assignments. Many businesses outsource work to independent contractors and freelancers when their staffs are overwhelmed and to avoid the costs of benefits and ongoing payroll that come with hiring new employees.   Continue reading

Zero cost federal tax deduction — business use of your home.

by Joe Heinrich, Certified SCORE Mentor

Nirvana would be that a small business owner could generate a deduction from her/his business’s taxable income at no cost. Well, that situation is available for many small business owners: the business use of the home deduction. However, not all of small business owners are taking advantage of this deduction due to not knowing about it or fearing that taking the deduction will trigger an IRS audit.

First, the facts. IRS regulations allow a business owner to take a deduction for the business use of the home, provided that the space is used “exclusively and regularly” for business purposes. The space can either be a room, a part of a room, a closet, the basement or garage, or a separate building on the home’s lot.  Continue reading

Independent Contractor as defined by the IRS.

People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.

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