It’s my annual “Taxes from A to Z” series! For the series, I’ll focus on terms that you might see on your tax forms and statements but not necessarily in the headlines. If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, this is one series you won’t want to miss.
S Is For Self-Employment Taxes.
When you work for someone else, your employer withholds and remits your portion of Social Security and Medicare taxes to the Internal Revenue Service (IRS). When you work for yourself, it is your responsibility to remit Social Security and Medicare taxes to the IRS: those taxes are referred to as self-employment taxes.
You are subject to self-employment tax if your net earnings from self-employment are $400 or more or you have church employee income of $108.28 or more. The rules apply no matter how old you are and even if you are already receiving Social Security or Medicare.
You figure your self-employment tax (SE tax) using Schedule SE (downloads as a pdf). The combined rate of self-employment tax is 15.3%, consisting of two parts: 12.4% for Social Security and 2.9% for Medicare.
Self-employment taxes aren’t payable on all of your earnings. Social Security tax is subject to a cap: the cap is $118,500 for 2015 and for 2016 (you don’t pay Social Security tax on earnings and/or wages above the cap). There is no cap on Medicare tax. Also, as of 2013, an additional Medicare tax rate of 0.9% went into effect for wages over a threshold amount. The threshold amounts are:
The bad news is, of course, that self-employed persons are responsible for paying both portions of Social Security and Medicare tax (remember, if you’re an employee, you’re only responsible for the employee portion while your employer pays the employer portion). The good news is that you can deduct the “employer-equivalent portion” (the portion that would have been paid by an employer) of your self-employment tax when figuring your income tax. You’ll do so right on the front page of your form 1040 at line 27:
(You can also deduct contributions to certain retirement plans and the cost of your health insurance on that same front page – using the lines immediately below at lines 28 and 29.)
You may have to file estimated taxes quarterly to pay your income tax and your self-employment tax in order to avoid a penalty at tax time. For more about estimated taxes, click here.
