Since federal income tax is considered a tax as you go, the Internal Revenue Service (IRS) requires the self-employed to make quarterly tax payments. Even if someone works for an employer and has a part time home business, they may still be required to make quarterly estimated tax payments. This article looks at the two different types of required taxes for the self-employed and the requirements for making quarterly payments.
Self-Employment Tax for Social Security and Medicare
In 2010 the total tax rate for social security is 12.4%. After total earnings of $106,800, there is no tax. The total Medicare tax for 2010 is 2.9%, regardless of total earnings. If a person works for someone else, his or her employer pays half of each tax and the employee is responsible for the other half. Social security and Medicare taxes are taken out the employee’s paycheck automatically.
- Social Security Tax 12.4%
- Medicare Tax 2.9%
- Total 15.3%
Since self-employed individuals don’t have an employer to pay half of the tax they must pay the entire 15.3% if net earnings are over $400. The Social Security and Medicare tax for the self-employed is known as the SE tax. Individuals that are in business for them selves must file Schedule SE (Self Employment Tax) of Form 1040. Completing the schedule will figure out the SE tax.
Filing Self-Employed Income Tax
Besides the SE tax, a self-employed individual may have to pay income tax on their net earnings. Generally Schedule C of Form 1040 is used to figure net earnings or gross income. Net earnings are usually figured by deducting business related expenses and cost of goods sold from total revenue.
Estimated Quarterly Tax Payments
Normally an individual must make quarterly estimated payments if the expected SE tax and income tax are over $1,000 for the year. If the taxpayer is unsure of their tax liability between the two taxes, it’s advisable to make the quarterly payments. If an individual has a tax liability over $1,000 and doesn’t make quarterly payments, there could be a monetary penalty.
If a person is self-employed and also works for an employer, they can have more taxes withheld from their paycheck to cover their SE taxes by making a change to the standard W4 form. On line 6 of the W4 there’s a provision for an additional amount to be withheld from the employee’s paycheck. This can be done in lieu of filing quarterly estimated taxes.
Net earnings that’s used to figure adjusted gross income is the actual profit that’s realized from the business. If a person has a home based business, they may be able to deduct a portion of the home expense to figure net earnings. Other expenses that may be deducted to figure net earnings may include, cost of goods sold, supplies and a deduction for vehicle usage.
Source:
irs.gov
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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