How to pay taxes in the US if you work for yourself

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You - entrepreneur and work for yourself, that is, do not get paid. But this does not exempt you from paying social taxes, known as self-employment tax or self-employed tax.

Once you have earned $400 after expenses ($108.28 for church employees), you must begin making regular payments to Social Security and Medicare until your earnings reach $118 in the case of Social Security (amount correct as of 500). Medicare payments are not based on income.

How to count

Fill out Appendix C (Schedule C) to form 1040, get the amount of taxable profit (31 line in the application) and multiply this amount by 92.35%. If the result is $ 400 ($ 108.28) or less, you do not have to pay tax. If this amount exceeds $ 400 ($ 108.28), then you are a tax payer. For example, you earned on sales in Etsy $ 550 after deducting all expenses. Multiplying this amount by 92.35% yields $ 508 - which means you have to pay tax on self-employed.

This tax is paid regardless of the age of the entrepreneur and on whether he or she is a recipient of payments on Social Security!

Where this tax is paid

With this tax, the government fills 2 main federal funds, from which various benefits and assistance are paid for the elderly, for victims of various disasters and for people with disabilities. People who earn a salary also pay this tax, better known as payroll taxes - it is deducted from each paycheck until the income reaches $118.

Each time you transfer a tax, the amount of payments is displayed in your individual profile in the Social Security Administration, and you are given points.

Tax rate

The tax consists of two parts:

12,4% Social Security - paid until annual income reaches $ 118 500 (2016 year).

2,9% Medicare - paid constantly, regardless of the amount of annual income.

Thus, until the amount of annual income reaches $ 118 500 (for 2016 year), the amount of self-employment tax is 15,3%.

However, the legislator takes into account the fact that in the case of labor relations 50% of payroll taxes is paid at the employer's expense, therefore, entrepreneurs have a special procedure for deducting such a part from taxable income. In practice, it looks like this: you specify the amount of your tax in the SE application, and then 50% of this amount is indicated in the 27 line of your 1040 form, which actually reduces your taxable income, which is indicated in the 38 line of the 1040 form.

For example, your taxable business income is $ 40 000. Next, we calculate income for self-employment tax: $ 36 940 ($ 40,000 x 92,35%), and now we determine the tax on the self-employed: $ 5 652 ($ 36 940 x 15,3%). Now determine the amount that will reduce your taxable annual income: $ 2 826 ($ 5 652 x 50%).

How to report

The report on the amounts of this tax is filed in the SE application (Schedule SE, Computation of Social Security Self-Employment Tax) along with the annual 1040 declaration and Annex C (Schedule C).

Advance payments

If the amount of tax exceeds $ 1 000 per year, you are required to pay in advance on a quarterly basis. Quarterly payments are calculated using the ES (Estimated Tax for Individuals) form, and payments are made either through the EFTPS electronic payment system (you must register with the system in order to use it) or by other means indicated on the IRS website.

Quarterly payments are made no later than the following dates:

This material does not constitute written tax advice or legal advice. Any information from this material is not created for use by the taxpayer in order to avoid any sanctions imposed on the taxpayer, and also can not be the basis for consultation by third parties. Please always consult a professional service before taking any action based on the information from this material. Keep in mind that information may be outdated at the time of reading, and we do not undertake to guarantee the updating of information. Copyright www.Solven.pro. Xnumx

Original article published on the site Solven.pro and reprinted with permission of the author.

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See also:

How does the USA pay taxes paid abroad?

5 ways to reduce your taxes for 2016 year

When to file a tax return in your state

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