Calculating Self Employment Tax In The US: 5 Tips You Should Be Aware Of
/In the eyes of the law, you’re self-employed when you have your own business whether physically or online, and if you’re a freelancer. Unlike employed individuals, you’re your own boss. This comes with its perks, but it also means one thing: you don’t have a company’s human resource department to automatically deduct the withholding tax from your wage. All matters relating to tax now fall into your hands.
While you’re self-employed, don’t forget that you aren’t exempt from paying taxes. Every citizen must do so. And, this is a function you have to get done the right way if you don’t want to fall into any sticky legal trouble.
Computing your self-employment tax can be quite complicated, especially if this is going to be your first time doing so. When you need help, it pays to go through resources and use available online tools like PAYE, so you can have some insights on how to get started.
1. Get To Know Your Legal Tax Percentage
The legal tax percentage that self-employed individuals have to pay isn’t the same. Again, you have to go back to your local laws.
To give you an idea, however, in the United States, the IRS charges taxes as a percentage of your net income as a self-employed person. This rate is around 12.4% for social security and another 2.9% for Medicare taxes.
Wherever your local area may be, it’s important to get this percentage right, so you won’t be underpaying or overpaying your taxes. You can make this computation process easier as well with the help of tools like tax calculator.
2. Obtain Your Social Security And Tax Identification Numbers
For you to be able to pay your self-employment tax, you must already have your own social security and tax identification number. If you’re new to the world of self-employment and you don’t have both yet, here’s how you can obtain it:
Visit the local Social Security office and apply for a social security number. You can also do this online, through their website, if applicable.
Some individuals may not be eligible for a social security number. These are those who are classified as non-resident or resident aliens. If you belong to this category, the IRS can issue a tax identification number for you.
3. Double-Check The Requisites If You Do Fall Under ‘Self-Employed’
Determining whether or not you’re classified as self-employed isn’t as easy as it seems. It has to match any of the following conditions:
You’re a member of a partnership limited liability corporation;
You’re the sole proprietor of a business whether one or other expanded locations;
You’re one of the partners in a legally-registered commercial partnership;
You’re the owner of a single-member limited liability corporation;
You work as an independent contractor.
If you still have any doubts as to whether or not you do belong to any of the above-mentioned, you may always ask your local tax body. Alternatively, you could get a retained tax bookkeeper or accountant to help you out with filing your taxes.
4. Determine The Exemptions For Self-Employment Tax
While no one is spared from paying taxes, there are individuals given grace by the government to temporarily exempt them from paying taxes - for example, low income earners. Moreover, there are certain tax deductions for self-employed earners, so, take note of those as well.
With that, any job, regardless of the type done, that earns less than $400 USD a year is exempt from paying taxes. Likewise, clergies who are fully supported by the congregation they support are also fully exempt from paying taxes.
5. Master Your Local Federal Or State Procedure In The Filing Of Taxes
This fifth insight is where things can get tricky. No one ever said that paying and filing taxes is an easy thing to do. It can be time-consuming. And, if you’re not yet well-versed with the computations, then you may commit a lot of errors, bringing you back to step one.
It’s therefore important to have a mastery of your local federal or state procedures related to filing of taxes. You don’t have to do this all on your own. You can always employ professional accountants for this purpose, or use tax accounting software, whichever you prefer.
The procedure can differ from one nation or state to another, so it’s best to check how it’s done. Also, don’t wait until the deadline to file your taxes. When you file early, you may also be eligible for tax discounts given by the government as incentives for early filing.
Final Insights
With the tips above, do remember, however, that they aren’t necessarily absolute. Moreover, this guide isn’t by all means exhaustive. After all, you have to consider certain differences attributed to your own federal or state laws.
At its best, the tips above should be more than sufficient to give you a gist on self-employment tax. Don’t forget to become familiar with your tax laws as well - this you can easily do with the help of a personal accountant and bookkeeper and the use of tax accounting software.
