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How does self employment tax work

how does self employment tax work

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Independent Contractors

Whether you are treated as an employee or an independent contractor (self-employed) depends on a number of factors, most of them related to how much independence you exercise on the job. If you set your own hours, work with your own tools, pay your own expenses and do not receive guidance or training from the party that pays you, you are almost certainly an independent contractor. If you receive Form 1099 from the party that pays you, you can be sure that party considers itself to be your client and you an independent contractor.

Tax Filing

As an independent contractor, you must pay estimated taxes at the end of every quarter using Form 1040-ES. You must also file Form 1040 and Schedule SE by April 15 every year. Your clients must send you Form 1099 after every tax year. to advise you of how much money they paid you. If your estimated tax payments grossly underestimate the amount you ultimately owe by April 15, you must pay simple interest at the rate of 8 percent per year on the difference between

what you paid and what you should have paid, even if you pay your annual taxes in full by April 15.

Business Deductions

As a self-employed taxpayer, you are entitled to deduct many of your business expenses from your taxable income. These include equipment expenses, travel expenses, business entertainment expenses and even training and education expenses. Limits apply to many of these deductions -- you may only deduct 50 percent of business meal expenses, on the assumption that you would have eaten anyway even if you hadn't been doing business. All expenses must be reasonable, and you must not have been reimbursed for them.

Self-Employment Tax

As a self-employed taxpayer, you have no employer deducting FICA taxes from your paycheck. To make up for this, you must pay a self-employment tax of 13.3 percent (for the 2011 tax year) on the first $106,800 of your taxable self-employment income, and 2.9 percent after that. You don't need to pay self-employment tax at all if you made less than $400 in self-employment income during the tax year. You can deduct half of self-employment taxes from your taxable income.

Category: Taxes

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