For those who work for themselves, there can be a nasty little surprise at the end of the tax year. Most of us are so used to employers removing income taxes from our checks that we hardly think about it anymore. Since self-employment tax is a major expense, it is vital to have at least some idea of what you're going to owe so you can put some money aside for the IRS.
The first thing you will need to know is if you need to pay self-employment tax. This is very simple. If you earned more than $400 net, you will need to pay self-employment tax on the amount. This is based on your net-not gross-income, so if it's near $400, you should check to see if the amount is net.
Once you know that you're paying self-employment tax, the next question is how much you're going to have to pay. The first number you're going to need to know is the tax rate. It is currently 13.3 percent of your net income. So to get a rough idea of your self-employment tax, simply multiply your monthly income by 12 to get a yearly total, then multiply that by .133. If you have this much saved at the end of the year, there shouldn't be too much of a problem. If you want a more precise number, you can always pick up Schedule SE from the IRS, as that is the form you will use to determine taxes later.
While the above will give you a rough estimate, there are two other things you need to figure that will also help out your wallet. The first is that before you actually figure out your wages, you will reduce your reported income by 7.65 percent. So you only pay taxes on 92.35 percent of your income. You will also be able to claim half of what you pay in self-employment tax as a deduction. If you need to know the exact numbers, this will be useful.
Finally, if you earn more than $106,800 during the year, you will have reached the cap for the Social Security. This means you will not have to pay any more into that fund. This drops the self-employment tax rate to 2.9 percent for the rest of your earnings.
For those who are trying to start a small business, self-employment taxes are a major expense. The first step to being able to survive that cost is to know what it is so that you don't find yourself paying penalties at the end of the year.
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