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The self-employed, such as sole proprietors, owners of part-time businesses, partners, and independent contractors, have certain federal tax obligations to fulfill. Generally, self-employed individuals must pay self-employment taxes and income taxes.
Self-employment (SE) taxes
SE tax rates are divided into two parts: Medicare and Social Security. The current rates are 2.9 percent for Medicare and 12.4 percent for Social Security. This means that net earnings are subject to a tax rate of 15.3 percent.
The Social Security part of SE taxes applies to net earnings in excess of $400 up to $113, 700. Earnings above the maximum will not be subject to the 12.4 percent tax. The Additional Medicare Tax went into effect in 2013 as part of the Affordable Care Act. Those whose earnings reach a certain threshold amount are required to pay an additional 0.9 percent Medicare tax. The threshold amounts depend on the individual's filing status. For example, the single filing status has a threshold amount of $200,000.
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Who needs to pay SE taxes?
• Self-employed individuals who had net earnings of $400 or more are required to pay SE taxes and file a Schedule SE (Form 1040.)
• Church workers with a net income of $108.28 or more.
• Ministers, members of religious orders, and Christian Science practitioners must pay SE taxes on their salaries, wages, and other income generated from the services they perform.
• U.S. citizens, with the exception of dual citizens, who are employed by foreign governments or international organizations must pay SE taxes for income generated from services performed in the United States, the Commonwealth of the North Mariana Islands, Guam, Puerto Rico, American Samoa, or the U.S. Virgin islands.
• U.S. citizens living outside of the country must pay SE taxes, unless they are working in a country with a Social Security agreement, in which case they only need to pay taxes in the country they're living in. Countries with these agreements currently include Australia, Canada, the U.K., France, and Germany. • Non-resident aliens from a country with a Social Security agreement.
• Debtors in Chapter 11 bankruptcy cases.
Estimating taxes and preparing tax returns can be confusing and time-consuming. For many people, hiring a tax professional such as a certified public accountant helps greatly in ensuring that their tax obligations are met and opportunities for tax benefits are researched and taken advantage of.
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