What are self-employment taxes?
Self-employment taxes are probably the least exciting thing about owning a business, but developing a system to handle them proactively and efficiently, can make the burden a LOT less daunting.
What are self-employment taxes? Self-employment taxes are made up of two separate taxes: 1) the Social Security tax (12.4%) and 2) the Medicare Tax (2.9%).
For 2022, the Social Security tax is applied to the first $147,000 of earnings (self-employment earnings and employee earnings combined).
Who has to pay self-employment tax? If you are self-employed and earn net income of $400 or more, you are subject to paying self-employment taxes. If your net income falls below $400 for the year, then no self-employment taxes are assessed.
**Please note that income taxes are a separate tax (which varies from person to person) and are applied on top of self-employment taxes**
In order to avoid receiving a huge tax bill at the end of the year, it is best to make estimated self-employment tax payments on a quarterly basis. In fact, if your total federal self-employment tax liability is more than $1,000, you are required to do so. While state rules will vary from state to state, Federal estimated payments can be made online at eftps.gov and are due on the following dates:
- 1st Quarter – April 15
- 2nd Quarter – June 15
- 3rd Quarter – September 15
- 4th Quarter – January 15
-
It is important to make sure you are taking advantage of all deductions available to you in order to save on these taxes. This is why proper bookkeeping and keeping up-to-date records is imperative!
To help ensure that you always have money in the bank and enough to cover your self-employment taxes, it is recommended that you automatically move 30% of all earnings into a separate account to save for taxes.
Now that you know about self-employment taxes and how to pay them, now’s the time to make a plan!
