If you’re a freelancer, independent contractor, or small business owner, you are required to pay self-employment taxes each year. Working for yourself has lots of perks but navigating how to pay your taxes can get confusing. The experts at Sound Bookkeepers are here to get your finances in order and guide you through the process so you can spend more time focusing on your business.
Self-employment tax is composed of two taxes, Social Security and Medicare. Everyone has to pay these taxes, but the process is different if you are self-employed rather than working for an employer.
Self-employment taxes are calculated as 15.3% of your net profit – 12.4% is for Social Security and 2.9% for Medicare. One of the key components of self-employment is that you don’t split this tax with your employer at 7.65%. When you are self-employed, the IRS requires you to pay the full 15.3%.
Let’s say you make $50,000 in a year. Your self-employment tax is calculated by multiplying $50,000 by 15.3%, which equals $7,650. On top of that, you also owe federal income tax which varies depending on how much your total income is including things like W-2 jobs, capital gains, and even gambling winnings.
Self-employment tax can be a big number and difficult to pay all at once since saving for the future is an area of challenge for most Americans. The IRS wants you to pay this 4 times a year, each quarter so that when you get to the end of the year, you have paid in most of what you will owe. If you don’t pay quarterly, you may incur late payment penalties from the IRS. But how much do you actually have to pay? There are rules which specify this. And it’s too complicated to explain here.
One way to lower your self-employment taxes is to deduct all the business expenses which are allowed. The IRS loves when taxpayers overclaim their income and pay too much in taxes. These deductions can be anything that is essential to running your business such as office expenses, computers, and auto expenses. Deducting these expenses lowers your net income, meaning your taxes will be lowered. A qualified tax preparer can help you determine how to maximize your deductions, but it’s the bookkeeper who keeps track.
If you still have questions about self-employment taxes or would like to work with an expert to make sure you are doing everything correctly, contact Sound Bookkeepers today. We are experts at bookkeeping and making sure that all of your finances are in order so that you pay exactly what you owe and not a penny more.
