Contractor Tax Exempt Form
Self-Employment Tax
This article addresses some of the key issues regarding self-employment tax. A careful reading of this material could make a big difference in how you think about self-employment tax.
Who must pay self-employment tax and why? Well, if you’re self-employed, you will be responsible for self-employment tax. How do you determine your liability? For the purpose of determining self-employment tax, you are self-employed if you are a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself. If you are a self-employed individual, you will have a Schedule C to attach to your Form 1040, and self-employment tax is computed on Form 1040, Schedule SE. Individuals must pay self-employment tax is they have net earnings of $400 or more and there are several sources of net earnings that are used when figuring your self-employment tax liability. In most cases, net earnings include net profit from a farm or nonfarm business; if you operate more than one business, your net earnings from self-employment are the combined net earnings from all your businesses. The upside to operating more than one business: If you have a loss in one business, it reduces the income from another. self-employment tax is the self-employed individual’s contribution to social security and Medicare taxes; the old-age taxes of employment. The only difference between the employee and the self-employed is the employee’s social security and Medicare taxes are paid half by the employee and half by the employer, when an individual is self-employed; he/she is responsible for the entire amount.
There are alternative methods that can be used for figuring liability of self-employment tax and they are: The Farm Optional Method and the NonFarm Optional Method. These methods may qualify an individual to claim a larger Earned Income Credit or Child Tax Credit; they may also, however, increase your self-employment tax liability.
The maximum amount of earnings subject to self-employment tax is currently $87,000.00. Now, when figuring your adjusted gross income on Form 1040, you may deduct up to one-half of your self-employment tax liability and if you are member of the ministry or clergy you may request an exemption from self-employment tax from the IRS.
It’s really a good idea to probe a little deeper into the subject of self-employment tax. What you learn may give you the confidence you need to venture into new areas.
When must self-employment taxes be paid? Generally, the self-employment taxes aren’t due until the end of the year, when your personal tax return is filed. Why is it this way? The self-employment tax isn’t due until the end of the year simply because of the fact that many self-employed business owners don’t file the net profit or net loss figures on their self-employment earnings, until the year’s end. If there is a net loss, the self-employed individual receives a credit of self-employment tax due, in the amount of one-half of the amount due.
The self-employment tax is the self-employed individual’s equivalent to the social security and Medicare tax deducted from employee’s paycheck each week. The wage earner’s taxes are configured by their employer and are deducted on a weekly basis. The self-employed individual isn’t required to make weekly payments of self-employment tax, but they are held liable for the full 15.3 rate, that is split between the employee and the employer in wage earning situations. In general, however, if you expect to owe taxes in excess of $1000 for the year, you are required to pay estimated taxes each quarter.
In summary, if you are self-employed, have net earnings of $400 or more, and file a tax return, you will be subject to self-employment tax. To learn more about individual liabilities, exemptions, and alternative tax methods, please visit the online site for IRS Forms and Publications at www.IRS.gov . Topic 554, Publication 517 and 533 will provide more detailed and situation specific information.
Of course, it’s impossible to put everything about self-employment tax into just one article. But you can’t deny that you’ve just added to your understanding about self-employment tax, and that’s time well spent.
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What is the difference between a sub contractor and an Independent contractor. I am really having a hard time!
I know the Independent contractor pays his taxes quartely and the Sub contractor does not! And that the Ind. pays the fica self employement taxes (medicare and social security) at the rate of 15.3% plus the federal and state taxes too. Is that the same for the Subcontractor as well. And I also heard that since my company is a partnership that if we were to get incorporated that we would be able to be exempt form the self employment tax! (fica) Is this true or not? We got a job offer from a company that wants us to be Independent contractors to work for them. But I am not sure if it is even worth it by the time we pay all of the taxes (or at least put the taxes to the side for quarterly pay) it seems that we would be broke. The job was i the area of around 50,000.00 a year paid every 2 weeks! Thank you
If you get paid, you are subject to FICA one way or another! If you are self-employed, you pay 15.3% SE tax. If you incorporate, you would get paid a salary or wages. Your wages are subject to 7.65% FICA taxes (Social Security & Medicare). The corporation is also subject to 7.65% FICA taxes. 7.65% + 7.65% = 15.3%. If you want money in your pocket, you have to pay into social security one way or another.
Sub Contractors and Independent Contractors are the same thing as far as the IRS or state government is concerned.
The IRS wants a Sub-Contractor to pay their quarterly tax estimates. They are also subject to the 15.3% self-employment tax.
If it is easier to keep track of, you can pay your estimates on a monthly basis. Just use three estimate coupons and pay every month. My opinion: it is easier for you to pay estimates than to deal with the payroll taxes you are going to have to deal with if you incorporate…
Lets see: Company A pays your Partnership $150,000. You give $50,000 to Partner Y and $50,000 to Partner Z. Assume 25% Federal Tax, 15.3% Self-employment Tax and 5% state tax. $27,350 stays in each of your pockets, $50,000 stays in the Partnership bank account and the Total Taxes Paid is $45,300.
If you incorporate and Company A pays your corporation $150,000 and you give Partner Y & Partner Z $50,000 Salary. Same tax rates, plus 10.8% unemployment tax. You don’t have to pay 15.3% self-employment tax, but you still have to pay 7.65% FICA taxes. Money in your pocket is now, $31,175, money in your partners pocket is also $31,175. But the corporation has to pay their 7.65% FICA taxes and the unemployment taxes, so the corporation now only has $41,270 in their bank account. Total Taxes Paid is now $46,380.
It sounds like you should sit down with an accountant or business consultant and go over the tax implications of your business structure as well as the liability issues.
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