Across the country, the number of people who define themselves as self-employed is growing. In 2019, the Bureau of Labor Statistics estimated there are 16 million self-employed in the United States. While taxes for the self-employed are similar to those of other business owners, there are some issues that should be considered through a somewhat different lens.
Let’s start with the big one – income taxes – first. Yes, you have to pay them, as well as state income taxes in most places. However, if you take advantage of all the available deductions, you can reduce your bill on both your state and federal returns, according to tax advisors.
Second on the list of special issues is the self-employment tax. Self-employment tax consists of social security and Medicare tax. As a self-employed person or business, you are responsible for paying both the employee and the employer share of social security and Medicare tax. This means your self-employment income is taxed at 15.3 % of the first $132,900. Note, that self-employed individuals first get a discount of 7.65% on self-employed income, so only 92.35% of self-employed income is factored into this equation. Income in excess of $132,900 is only subject to the Medicare portion of self-employment tax, at a rate of 2.9%.
Next up are payroll taxes. If you employ others in your business, you are responsible for paying half of their social security and Medicare taxes, in addition to the unemployment insurance tax and, in some cases, short-term disability tax. Be aware as well that you’re responsible for withholding payroll taxes and sending them to the IRS. The penalty for failing to meet these obligations can be severe. The “trust fund penalty” can hold you personally liable for underpayments due to “willful failure,” financial experts say.
Last, but not least, are sales taxes. This area is evolving, particularly for online businesses. You should check with your tax advisor to see if your business may need to register in your state to pay the appropriate tax, according to tax experts. It’s no longer required that your business have a physical presence in a state, in order for the state to levy a sales tax. In other words, states now have the right to require tax collection from online retailers that don’t have a physical presence in said state.
Being self-employed brings its own unique set of challenges to a taxpayer. If you are self-employed, be sure to educate yourself about taxes and other legal and financial aspects of self-employment. And don’t be afraid to seek the help of trusted advisors. The tax advisors at Diamond & Associates, PC CPAs are here to help with all of your tax and accounting needs and concerns!