Self employment taxes FAQs
In most cases, if you earned more than $400, you will need to pay self-employment taxes. Unlike federal income taxes, these taxes are based on net earning and not adjustable income. Everyone has to pay. Self-employment taxes include Social Security and Medicare taxes. In 2018 the tax rate for Social Security was 12.4 percent and 2.9 percent for Medicare. If you earn over $200,000, you may have to pay additional Medicare taxes. To help you stay compliant, you should make these payments quarterly.
In many ways, self-employed and sole proprietorships are the same. Both have to pay self-employment taxes and they have no liability protection. The only difference is how you get paid. If you are operating a sole proprietorship, your client makes payments to your business. If you are self-employed, your client pays you and supplies you with a 1099-MISC form to report your income to the IRS. There are few advantages to operating your business or earning income in this way.
You may want to consider starting your own business. Even if you are a one-person business, there are advantages to incorporating. The first is that it separates your business and personal incomes and expenses. The second is liability protection. If your business fails, your personal assets may be protected. If you are sued, your personal assets may be protected should you lose your case. The only difference to your clients is that they would be paying your business rather than to your name personally.
If you do not pay your self-employment taxes or underpay your taxes, you may also have to pay a penalty. To help comply with IRS requirements, it is best if you make quarterly payments rather than facing a large tax bill at the end of the year.
However, don't expect to avoid penalties. To avoid having to pay penalties, pay your quarterly estimated taxes as accurately as you can. If you owe, try to make payment arrangements with the IRS. If you forgot to include a 1099-MISC with your taxes, you can file an amendment (1040X). If you do not pay the IRS your income and assets may be at risk. Consult with your accountant if you require assistance.