Self-employment tax is the bane of existence for many sole proprietors. And it’s often a surprise to people who are new to self-employment — they file their tax return and find out that things often turn out much differently when you’re self-employed.
What is Self-Employment Tax?
Self-employment tax is the self-employed person’s version of FICA taxes (FICA taxes = Social Security and Medicare taxes).
Self-employed people account for self-employment tax on their personal tax return. As I attempted to explain in this post, to calculate self-employment tax, you do the following:
- Multiply your net self-employment income by 92.35% (.9235)
- Multiply that result by 15.3% to arrive at self-employment tax
Plan for It
So yes, this is effectively another 15% owed on top of any income tax you might owe. And if you didn’t make estimated tax payments during the year, you can be left in a world of hurt at tax time.
The reason this is such a surprise to people who are new to self-employment is, they are used to working at a job where the taxes are withheld from paychecks. When you’re self-employed, there’s no such thing as a salary or a paycheck, so your only “withholding” comes in the form of estimated tax payments, which is something most people who are new to self-employment have never heard of or dealt with before.
The best way to manage self-employment tax, aside from the obvious of finding all the deductions you can find, is to make estimated tax payments to help offset the blow.
“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”