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.
Question from a web visitor: why is the deduction for 1/2 of self-employment tax taken on the front side of the 1040 and not on the proprietorship’s Schedule C?
On the Iowa 1040, taxpayers are required to add federal self-employment tax for the current year into income for Iowa purposes. Why does Iowa require this?
So why does the IRS care so much about employee vs. contractor? Two reasons. One is the penalties they can collect. The other reason is they usually collect more taxes when someone is treated as an employee, because a contractor can take business deductions which directly reduce taxable income.
The answer is yes, you have to pay self-employment or FICA taxes. There is one exception, where a person can opt out of paying these taxes (but this means not receiving benefits later on). This exception only applies to members of the clergy and members of certain religious sects.