October is a super busy month for tax filings with the IRS and other regulatory bodies because corporate income tax extensions, quarterly sales tax payments and employment tax returns are due.
We've got some clients that are considered self-employed, so this post is dedicated to understanding your obligations if you're self-employed.
Who is considered self-employed?
The IRS defines self employed as carrying on a trade or business as a sole proprietor or an independent contractor (i.e. 10-99), you are a member of a partnership, or you are otherwise in business by yourself. This means that even if you are are an LLC you could be paying self-employment taxes.
So, what are your obligations for filing employment taxes with the IRS?
- You are required to file an annual return and pay estimated tax quarterly.
- Generally, you are required to pay self-employment tax (SE tax) in addition to your income tax. The reason why you are required to pay SE tax, is that you don't have an employer doing so on your behalf. The SE tax is your portion of the social security and medicare tax that you as an employer of yourself are required to pay.
How much self employment tax should you pay?
Before knowing how much you should pay for SE tax, you first need to know how much you've made for your business by determining your net income or net loss. Once this amount is determined, here are the next steps:
- 1. To determine the amount of SE taxes you will need to pay, you should file Form 1040-ES, Estimated Tax for Individuals. There is a worksheet that will inform you if you owe self-employment taxes.
- Use the self employment tax rate of 15.3%. (12.4% for social security and 2.9%). This is under the assumption your net income is less than $118,000 for the tax year. The rate is different if you make more than this.
- 3. Once this has been determined, it's pretty easy to pay this liability out to the IRS.
Self employment taxes are definitely something to keep in mind throughout the year, you don't want to have a huge penalty or balance due at the end of the year. Any questions or comments? Leave them below!