Self-Employment Tax

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Dinesh Singhal, Esq.

Rocket Lawyer On Call Attorney

Common Self-Employment Tax Questions

How does the new tax law affect me?

The Tax Cuts and Jobs Act became effective as a law on January 1, 2018. Learn what the new law means for businesses, homeowners, and residents of certain states.

Who must pay self-employment tax?

Freelancers, contract workers and self-employed people, who make over $400 in earnings or more, are required to file and pay tax obligations. Many falsely believe that if they do not earn much, they do not need to file or pay. But this is not the case, even if you are paid in cash or by barter. Everyone needs to file and pay their tax obligations, which includes Social Security and Medicare tax. If your sole-proprietorship business earned a net loss, you still need to file and account for this loss. Often most businesses will also need to pay estimated quarterly taxes.

What is the self-employment tax rate?

The latest information released by the IRS relates that the tax rate is 15.3% for income less than $127,200. Estimated tax calculators for 2017 are available on the IRS website as well as popular tax software sites such as TaxACT and QuickBooks. Broken down, tax liability is 12.4% for Social Security and 2.9% for Medicare. Individual incomes over $200,000 are required to pay an additional 0.9% in Medicare tax. It should be noted that some tax obligations are not affected by deductions and credits. If you are unsure about filing your own taxes, you should consult with your accountant and tax attorney.

Is there a self-employment tax form?

Yes, there is a self-employment tax form. It's called an Schedule SE 1040. The form itself has a flowchart that can help you decide whether you need to fill out a long or short version of SE 1040, based on how much income you made, whether any of your income involved tips, etc. Since mistakes can sometimes be costly, consider asking a tax attorney about self-employment taxes if you're confused on how to start. Additionally, most tax software/services also provide the IRS and state forms required to file your business taxes.

What are some common self-employment tax deductions?

The most common deductions are home-office expenses. These types of deductibles are available to homeowners and renters. The standard deduction for home office space, using the simplified method of calculating, is $5 per square foot with a maximum of 300 square feet. The claimed space must be used exclusively for business. Business owners also have the option of calculating costs using the regular method, which may allow more extensive deductions. Other common deductions include advertising, insurance, travel expenses and contract labor. To help prepare yourself to take advantage of possible deductions, it is best to keep meticulous business records.

Does the Affordable Care Act (ACA) healthcare tax apply to sole proprietors?

Self-employed people will in fact need to have health insurance or be faced with the associated penalties that apply to most uninsured filers. For 2017, the fee is 2.5% of the household income or $695 per person, whichever is more, up to $2,085. The newly passed tax plan repeals this penalty starting in 2018.

What are the benefits to incorporating your business?

The biggest advantage is that incorporating separates business and personal assets and liabilities. Forming your business into an Limited Liability Corporation (LLC) or S Corporation (S-corp) can help you protect your personal assets should something go wrong. Incorporation cannot prevent your company from being sued, but it protects the seizing of your personal assets to cover a business debt. In addition, many use their business to take advantage of tax deferrals since business taxes are often lower than personal tax obligations on the same amount of income.

If I work as an employee, do I still have to pay self-employment tax?

You might, depending on if your taxes paid from your employee wages were not enough to offset your self-employment income. At the minimum, you will need to pay Medicare tax. However, in most cases, you will also need to pay Social Security taxes. A common situation that would fit this example is an employee who drives for a ride-sharing service on off hours for extra income. It is highly recommended that people in these situations set aside money for covering their tax obligation rather than having to come up with it all at once when they file.

How do I make quarterly tax payments?

While you may not be able to predict your business income for the year exactly, you can utilize the IRS estimated tax tool to predict what you might owe. Using Form 1040-ES you can estimate your tax obligation and utilize the included blank vouchers for submitting payments. If you estimate your amount incorrectly, you simply fill out another 1040-ES. Payments can be made online, by phone or by mail. The IRS preferred method is by using its Electronic Federal Tax Payment system (EFTPS). If you have questions about filing quarterly tax payments, talk to a tax lawyer or an accountant.

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