Self Employed? Here’s What You Need to Know About Employment Taxes

Chances are you need to pay Social Security and Medicare taxes in addition to income taxes on all earned income – including a regular salary or self-employment income. If your wage base will be $118,500 for 2016, you are subject to the 12.4% Social Security tax. However, all earned income is subject to the 2.9% Medicare tax.

Typically, your employer pays half of the Social Security and Medicare taxes. If you’re self-employed, however, you must pay both the employer and employee of these taxes on any income you earn.

Higher Incomes Pay More Medicare Tax

Those with higher FICA wages and net self-employment incomes must pay an additional 0.9% in Medicare tax. This additional tax applies to those single filers that earn in excess of $200,000 per year. For those that are married, filing jointly, the income level is $250,000 ($125,000 for anyone who is married and filing separately).

You may need to utilize some income timing strategies to help minimize or avoid this tax if there is a significant variance in your self-employment income or if your income level is close to the threshold. One way to better time your income if you are self-employed would be if you have some flexibility on when you invoice customers or make some business purchases. Likewise, if your self-employment income is earned on top of a regular salary, you may be able to work with your employer on timing a bonus.

Those with salaried income have other situations to consider. The withholding rules mandate that employers begin withholding the Medicare tax beginning in the pay period when your wages first exceed the $200,000 for the calendar year – no matter what the employee’s filing status is or how much income that employee receives from other sources. Likewise, if your salaried income doesn’t exceed $200,000, your employer won’t withhold the additional tax, even though you are liable for it because of additional self-employment income.

If you believe you will owe this additional tax as a combination of salaried and self-employment income, you can file a new W-4 form with your employer to request additional income withholding that can be used to cover any additional taxes. This will help you avoid interest and penalties. Another option would be to make estimated tax payments.

Self-Employment Deductions

For those that are self-employed, the portion of the Social Security and Medicare taxes that an employer would normally pay are deductible above the line. This translates to 6.2% for the Social Security tax and 1.45% of the total Medicare tax. Note that no portion of the additional Medicare tax is deductible – this amount is the sole responsibility of the employee or self-employed.

 

There are other above-the-line tax deductions that the self-employed may be eligible to claim as well. These types of deductions reduce your adjusted gross income (AGI) and modified AGI (MAGI), making them particularly helpful to the self-employed. The AGI and MAGI are triggers for certain additional taxes and “phaseouts” of many tax breaks.

  • You are allowed to deduct 100% of health insurance costs for your spouse, your dependents, and yourself – up to your net income.
  • Contributions to a retirement plan are also deductible.
  • You can also deduct an HAS for yourself.

If you are earning self-employment income either on a part time or full time basis, let us help you plan the most effective strategy for reducing your overall tax burden.

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