If you earned more than $400 during 2012 from work as a sole proprietor or independent contractor, you may owe self-employment tax. That’s true no matter what your age – even if you’re receiving social security benefits.
The tax is assessed on your earnings from self-employment, which can include income from qualified joint ventures and partnerships, as well as fees you earn working as a director for a corporation. In this context, “earnings” generally means your income after deducting expenses incurred while operating your business. If you have multiple businesses, you combine the net income and losses.
For your 2012 return, the self-employment tax rate is 13.3% on the first $110,100 that you earned. For 2013, the taxable base rises to $113,700, and the tax rate increases to 15.3%. Income above the base amounts is still subject to Medicare tax at a 2.9% rate.
What happens when you earn social security wages or tips from an employer and also have a side business? Your wages count toward the taxable base. Depending on how much you earn as an employee, your self-employment income may be subject to part or all of the tax.
You can pay self-employment tax on a quarterly basis as part of your estimated tax payments. One half of the total self-employment tax that you pay during the year is deductible on your income tax return, and you don’t have to itemize to claim the deduction.
Are you new to self-employment? Give us a call. We’re happy to offer guidance and help you make smart tax decisions.
Tags: self employment taxes
Written by: Doug Rodrigues