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Self Employed Tax Factsheet
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Most people who pay
into Social Security work for someone else. Their employer deducts
Social Security taxes from their paycheck, matches that contribution and
sends wage reports and taxes to the Internal Revenue Service (IRS) and
Social Security. But self-employed people must report their earnings and
pay the taxes directly to IRS. This factsheet explains that process.
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You are self-employed if you operate a
trade, businessor profession, either by yourself or as a partner. You
report your earnings for Social Security when you file your federal
income tax return. If your net earnings are $400 or more in a year, you
must report your earnings on Schedule SE for Social Security purposes,
in addition to the other tax forms you must file.
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Paying Social Security And Medicare Taxes
The Social Security tax rate for 2003 is
15.3 percent (the same as 2002) on self-employment income up to $87,000.
If your net earnings exceed $87,000, you continue to pay only the
Medicare portion of the Social Security tax, which is 2.9 percent, on
the rest of your earnings. There are two income tax deductions that
reduce your tax liability. The deductions are intended to make sure
self-employed people are treated in much the same way as employers and
employees for Social Security and income tax purposes.
First, your net earnings from
self-employment are reduced by an amount equal to half of your total
Social Security tax. This is similar to the way employees are treated
under the tax laws because the employer's share of the Social Security
tax is not considered income to the employee.
Second, you can deduct half of your
Social Security tax on the face of the IRS Form 1040. This means the
deduction is taken from your gross income in determining adjusted gross
income. It cannot be an itemized deduction and must not be listed on
your Schedule C.
If you have wages as well as
self-employment earnings, the tax on your wages is paid first. But this
rule is important only if your total earnings are more than $87,000. For
example, if you have $20,000 in wages and $30,000 in self-employment
income in 2003, you pay the appropriate Social Security taxes on both
your wages and businessearnings. However, in 2003 if your wages are
$70,000 and you have $20,000 in net earnings from a business , you do
not pay dual Social Security taxes on earnings
above $87,000. Your employer will withhold 7.65 percent in Social
Security and Medicare taxes on your $70,000 in earnings. You must pay
15.3 percent in Social Security and Medicare taxes on your first $17,000
in self-employment earnings and 2.9 percent in Medicare tax on the
remaining $3,000 in earnings.
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Earnings Credits
You need earnings credits to qualify for
Social Security benefits. The number of credits you need depends on your
date of birth, but no one needs more than 40. You can earn up to four
credits per year.
If your net earnings are $3,560 or more,
you earn four credits--one for each $890 of earnings. (If your net
earnings are less than $890, you still may earn one or more credits by
using the optional method described later in this factsheet.)
All of your earnings covered by Social
Security are used in figuring the amount of your Social Security
benefit. So, it's important that you report all of your earnings up to
the maximum as required by law.
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Figuring Your Net Earnings
Net earnings for Social Security are your
gross earnings from your trade or business , minus your allowable
businessdeductions and depreciation.
Some income doesn't count for Social
Security. Don't include the following in figuring your net earnings:
 | dividends from shares of stock and interest on
bonds, unless you receive them as a dealer in stocks and securities;
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| interest from loans, unless your businessis
lending money; |
| rentals from real estate, unless you are a real
estate dealer or regularly provide services mostly for the convenience
of the occupant; or |
| income received from a limited partnership.
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Optional Method
If your actual net earnings are less than
$400, your earnings can still count for Social Security under an
optional method of reporting. The optional method can be used if your
gross earnings are $600 or more or when your profit is less than $1,600.
You can use the optional method
no more than five times. Your actual net must
have been $400 or more in at least two of the last three years, and your
net earnings must be less than two-thirds of your gross income.
Here's how it works:
| if your gross income from self-employment is
between $600 and $2,400, you may report two-thirds of your gross
or your actual net earnings if $400 or more;
or |
| if your gross income is $2,400 or more and the
actual net earnings are $1,600 or less, you report
either $1,600 or
your actual net. |
Special Note For
Farmers: If you're a farmer, you can use the
optional reporting method every year. It's not necessary to have had
actual net earnings of at least $400 in a preceding year. We suggest you
call Social Security and ask for the booklet,
A Guide for
Farmers, Growers and Crew Leaders (Publication No. 05-10025).
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How To Report Earnings
You must complete the following federal
tax forms by April 15 following any year in which you have net earnings
of $400 or more:
| Form 1040 (U.S. Individual
Income Tax Return); |
| Schedule C (Profit or loss
from Business) or Schedule F (Profit or
Loss from Farming as appropriate; and |
| Schedule SE (Self-Employment
Tax). |
These forms can be obtained from IRS and
most banks and post offices.
Send the tax return and schedules along
with your self-employment tax to IRS.
Even if you don't owe any income tax, you
must complete Form 1040 and Schedule SE to pay self-employment Social
Security tax. This is true even if you already get Social Security
benefits.
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| Family Business
Arrangements
Family members may operate a businesstogether. A
husband and a wife may be partners or running a joint venture. If you
operate a businesstogether as partners, you should each report your
share of the businessprofits as net earnings on separate
self-employment returns (Schedule SE), even if you file a joint income
tax return. The partners must decide the amount of net earnings each
should report (for example 50% and 50%).
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For More Information
Visit our website at
www.socialsecurity.gov for more information and special
services. You can download or print forms and publications; use the
Benefit Planners for financial planning; apply for retirement or
spouse's benefits; subscribe to eNews for
up-to-date news about Social Security programs and benefits; and correct
or change your name on your Social Security card or get a replacement
card by requesting a form SS-5. We will continue to add online services
to make it as easy and convenient as possible for you to do business
with us.
You also may call toll-free at
1-800-772-1213. We can answer specific questions by phone from 7
a.m. to 7 p.m. on businessdays and provide information by automated
phone service 24 hours a day. If you are deaf or hard of hearing, you
may call our TTY number, 1-800-325-0778 between 7 a.m. and 7 p.m. on
businessdays.
We treat all calls confidentially whether
they're made to our toll-free numbers or to one of our offices. We also
want to make sure you receive accurate and courteous service. That is
why we have a second Social Security representative monitor some
incoming and outgoing calls.
From Wikipedia, the free
encyclopedia
Self-employment is the individual pursuit of capitalism. To be
self-employed, an individual is normally highly skilled in a trade or
has a niche product or service for their local community. With the
creation of the Internet the ability for an individual to become
self-employed has increased dramatically. The amount of money spent on
self-help, self-improvement and training materials has reached the
billions in the past decade.
Self-Employed People can also be referred to as a person who works for
himself/herself instead of an employer, but drawing income from a trade
or business that they operate personally.
To Be self-employed is not the same as being a business owner: A
business owner is not required to be hands-on with the day-to-day
operations of his or her company, while a self-employed person has to
utilize a very hands-on approach in order to survive.
Self-employment law in the United States
Taxation in the US
In the United States self-employed workers are paid directly by clients
or by their business, and some proportion of these payments is due to
the government as income tax.
In the United States, a person running a business as a sole
proprietorship or a limited liability company is considered
self-employed for tax purposes, but the sole shareholder of an S
corporation is not considered self-employed. Such a person is considered
an employee of the corporation and does not pay self-employment tax, but
instead pays FICA tax (matched by the corporation) at half the tax rate
at which the self-employment tax is imposed -- 7.65% each by employer
and corporation, instead of the 15.3% self-employment tax.
The self-employed in the United States are usually required to pay
estimated income taxes quarterly. They pay both the employee and
employer portions of the FICA tax (which pays for Social Security and
Medicare), since they are considered both the employer and the employee.
An employed person pays 7.65% (6.2% for Social Security and 1.45% for
Medicare) through a paycheck deduction, and the employer pays the other
7.65%. The self-employed person pays both sides of this tax, or 15.30%
total. However, since half of the hypothetical self-employment tax is
allowed as a deduction against self-employment income, only 92.35% of
the self-employment income is taxable at 15.30%, an effective tax rate
of about 14.13%. This tax is reported on Schedule SE of the IRS Form
1040.
Many self-employed choose to incorporate to reduce this tax. Before
incorporation, a self-employed person making $100,000 in business profit
would pay 15.30% of that profit in self-employment tax, or $15,300. But
with an incorporated business, the business can pay the owner $50,000 in
salary and $50,000 in dividends (called "distributions"). The owner pays
7.65% of the $50,000 in salary and his/her corporation pays the other
7.65%, for $7650 total. Distributions are not subject to self-employment
tax, so there is no FICA/Medicare tax on the $50,000 in distributions.
Thus the business owner may save $7,650 in taxes. However, tax laws can
be tricky, and do change, so it is usually advisable to seek the advice
of a competent accountant in taking the decision to incorporate for the
purpose of saving tax. (Note, however, that the above example is
slightly over-simplified -- the 12.4% OASDI portion of the
self-employment tax, or the 6.2% OASDI portion of the FICA tax applies
only to the OASDI wage base, which is the first $94,200 of
self-employment income in 2006, or $97,500 in 2007. The 2.9% Medicare
portion of the self-employment tax and the 1.45% Medicare portion of the
FICA tax applies to all self-employment income.)
Self-employed persons are sometimes eligible for more deductions than an
ordinary employee. Travel, uniforms, computer equipment, cell phones,
etc., can be deducted as legitimate business expenses. However, again,
the advice of an expert may be worth the money it costs.
Self-employed persons report their business income or loss on Schedule C
of IRS Form 1040 and calculate the self-employment tax on Schedule SE of
IRS Form 1040.
Self-employed 401k retirement account
Self-employed workers cannot contribute to a 401k plan of the type with
which most people are familiar. However, there are various vehicles
available to self-employed individuals to save for retirement. Many set
up a Simplified Employee Pension Plan (SEP) IRA, which allows them to
contribute up to 25% of their income, up to $44,000 (2006) per year.
There is also a vehicle called the Self-Employed 401k or SE 401k for
self-employed people. The contribution limits vary slightly depending on
how your business is organized but are generally higher than the other
types of plans.
Self-employment law in the United Kingdom
A self-employed person in the United Kingdom can operate as a sole
trader or as an incorporated limited liability company. It is also
possible for someone to form a business that is run only part-time or
concurrently while holding down a full time job. This form of
employment, while popular, does come with several legal
responsibilities. When working from home clearance is required from the
local authority to use part of the home as business premises. Should the
business hold records of customers or suppliers in any electronic form
it is required to register with the Data Protection Registrar. Other
legal responsibilities include statutory public liability insurance
cover, modifying premises to be disabled friendly, and the proper
recording and accounting of financial transactions. Free advice on the
range of responsibilities is available from government operated Business
Taxation in the UK
A self-employed person may be subject to more taxes than an average
employee. In addition to both the employee and employer National
Insurance contributions, there may be VAT, business rates and other
taxes payable to central and local governments.
Both in the US and the UK governments are cracking down on disguised
employment, often described as the pretence of a contractual
intra-business relationship to hide what is otherwise a simple
employer-employee relationship.
Related Articles:
Self Employed Factsheet
Self Employment Tax
Tax Filing
Requirements
Tax Filing Errors
:2005 Tax Changes
Turbo Tax - Basic Overview
Tax Payment Options
Cut 2004 Taxes
Which Tax Form? The Basics Explained
SUV TAX DEDUCTION LIST
Tax Deductible SUV
Section 179-SUV Tax Deduction
SUV Tax Deduction - Section 179 Pitfalls
SUV TAX Loophole
2004 Mileage Rates - Use for 2004 Return
IRS E-file
IRS E-file Step by Step
IRS E-file Basics
E-file on your PC
IRS Free File
IRS Free
File FAQ |
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