How To Calculate Self-Employment Tax 

Being self-employed brings many freedoms and a string of advantages. But it also brings the responsibilities that occur with tax obligations. Accurate calculation of what you owe is an essential element of this kind of work. With more and more opting to work in the gig economy or through setting up a business of their own, it’s a skill that many need to acquire.

The following guide simplifies the major aspects of calculating self-employment tax once and for all…

Self-Employment Tax: What you need to know

• What is self-employment tax?
• Understanding self-employment tax obligations
• How much will I need to pay in self-employment tax? 

What is self-employment tax? 

Self-employment tax consists of both Social Security and Medicare taxes. If you’re employed by a company, then these payments are automatically deducted from your wage. If you’re self-employed, then it’s your responsibility to correctly calculate what you own and pay it to the IRS each year.

You’re considered to be self-employed if you fall into any of the following categories:

• A partner in a business partnership
• A member in an LLC, depending on how the LLC elects to be treated for tax purposes
• A sole proprietor
• An independent contractor
• A freelancer (gig economy, etc.)

Understanding self-employment tax obligations

The tax rate for the self-employed is 15.3%, up to a base amount. This is made up of 2.9% for Medicare and 12.4% for Social Security. Your income as a self-employed person is considered to be made up of combined wages, tips, and net earnings. Those who earn over a certain amount might be subjected to higher Medicare tax. 

You’re also able to deduct the employer-equivalent portion of self-employment tax, in regard to income tax. A deduction is also allowed for the cost of health insurance. The amount of both of these deductions will be dependent on your personal circumstances.

How much will I need to pay in self-employment tax?

The amount you pay in self-employment tax varies. This depends on your circumstances and the annual amount earned. The IRS website states that you must pay self-employment tax if: 

Your net earnings from self-employment (excluding church employee income) were $400 or more

You had church employee income of $108.28 or more

You’ll need to obtain a social security number (SSN) and an individual taxpayer identification number (ITIN). Some people may have to file Estimated Taxes every quarter, with any adjustments made the following year. 

Other aspects that need to be considered include:

• Self-employed Americans living abroad might still have an obligation to pay self-employment tax and any additional Medicare tax. This is a complex area and it’s highly advisable to take expert advice.
• Certain regions require the self-employed to pay separate city taxes
• You’ll also have to pay any state and local taxes

Tax obligations for the self-employed tend to be higher than those paid by the employed. However, this is the ‘on-paper’ rate. There are certain tax benefits, breaks, and write-offs that can be leveraged to provide a more efficient tax rate.

While it’s wholly possible for a self-employed person to take care of their tax obligations, the complexities involved mean that many find it easier (and less stressful) to allow an experienced service to take care of the numbers for them.

Need Assistance Calculating Your Self-Employment Tax? Contact Capital Today

Leading global financial institution, Capita, provides bespoke self-employment tax services to suit every level of business. Whether you’re a jobbing Uber driver or running your own successful SME, they can take away the pain of self-employment tax assessment.

Visit https://www.capitafinancialnetwork.com today and discover the many advantages of handing over your tax obligations to the experts.