Did you work for yourself as an independent contractor or a sole proprietor in 2016? If so, you may owe self-employment taxes on your earnings. That's true no matter what your age – even if you're receiving social security benefits. Here’s why:
When it comes to taxes, working for yourself is a very different situation than working for an employer. As an employee, your earnings are taxed at a 6.2% rate for Social Security and 1.45% for Medicare. Additionally, your employer also contributes the same amount -- a total of 7.65% of your wages. However, when you're self-employed, you are the employer and the employee. Therefore, you're responsible for paying all of the Social Security and Medicare taxes, which adds up to 15.3%.
The tax is assessed on your net earnings from self-employment. Income from qualified joint ventures and partnerships, as well as fees as a director for a corporation are included. In this context, income minus deductible business operating expenses constitutes your taxable "earnings." If you have multiple businesses, you combine the net income and losses.
The self-employed person's tax rate for 2016 is 15.3% which is assessed on the taxable base - first $118,500 of net income - and then 2.9% on the net income that is in excess of $118,500. (The percentages and the earnings limit are unchanged from 2015.) In addition, a Medicare surtax of .9% is assessed on all self-employment income in excess of $200,000 for singles and $250,000 for couples.
Do you have a side business in addition to a regular job? If you earn social security wages or tips from an employer, your wages count toward the taxable base. Depending on how much you earn as an employee, your additional self-employment income may be subject to part or all of the tax.
You pay self-employment tax on a quarterly basis as part of your estimated tax payments. One-half of the total tax that you pay during the year is deductible on your income tax return, and you don't have to itemize to claim the deduction.
Confused? The professional expertise available with tax preparation services may be the answer. Advice about financial record keeping will make your process more efficient. Once you have tackled the current year's filing and payment, it's time to begin planning for the next year!
Charles P Myrick CPA, Washington DC tax preparation firm, specializes in accounting and bookkeeping services for new business start ups and entrepreneurs. If you are a new entrepreneur, give us a call. We invite you to learn more about the accounting services for small business that are available: (202) 789-8898.