It is Taxing to Be Self-Employed

Yes, in so many ways it is taxing and especially when you consider the self-employment tax. Just the name sounds wrong, “I am being taxed just because I am self-employed?” Kind of. Let’s take a look at this tax and understand exactly what it is.

When you are an employee, your employer withholds Social Security (FICA for us old-timers but officially OASDI – Old Age, Survivors, and Disability Income) from your paycheck at a rate of 6.2% of your taxable wages up to the limit. This is to pay for your social security benefit at retirement or your disability income benefit if you become disabled and have sufficient credits to qualify. This applies to income up to $118,500 in 2016 (no change from 2015.) That’s another reason to up your income above that $118,500 level!

They also withhold for Medicare at a rate of 1.45% on all income. There is no limit here and there can be a Medicare surtax on certain high income taxpayers.

If you have been an employee, you are used to seeing those amounts withheld as “payroll taxes.” Behind the scenes, your employer had to match those taxes and remit an equal amount as the employer contribution. When you are self-employed, guess who is the employer? You! You get the pleasure of paying the normal employee payroll taxes of 6.2% plus 1.45% AND the employer match of 6.2% and 1.45%. To make things confusing, the IRS just calls the total 15.3% self-employment tax.

When you complete the tax return, the software is programmed to consider the limit of $118,500 so it will apply the 15.3% to the first 118,500 and then just 2.9% to the amounts above that. If you have income of less than $400, you do not owe self-employment tax.

If you are self-employed, you will likely need to make estimated tax payments each quarter since there is no employer withholding these payroll tax amounts or the federal and state income tax amounts. You should make those payments by April 15th, June 15th, September 15th and January 15th to make sure you pay in most of your tax prior to the due date. If you underpay by more than $1,000, you may have to pay a penalty.

As you look at cash flow and consider how to increase income, don’t forget to plan for SE tax. However, as taxing as it can be to own your own business, the ability to create your own income stream, follow a passion, and build a business is like nothing else in the world!

To your financial (and business) success,


Let’s Get Organized!

January has come and gone which means a) the year is racing by, b) most people have already bagged their new year’s resolutions, c) you have gotten a bunch of tax forms in the mail, or d) all of the above?

If you picked “d,” you are a winner! The year is racing by, everybody, except you, has bagged those resolutions, and you do now have a stack of tax forms, or will soon because the mail date is upon us. So, in honor of all those busy beavers who worked so hard to prepare those tax forms, let’s have a quick run-through of what they are, what they mean, and how you can get them all organized now and avoid the April rush.

To help you and your tax accountant prepare that tax return with ease, grab a couple of large envelopes and let’s sort through those forms and add a few other things that you will need.

Label one envelope “Income Items.” In that envelope will go:

  • W-2’s – the form that you received from your employer if you worked as an employee. Take a quick peek and make sure the income number matches what your total salary and bonus is. Does any 401k contribution show up correctly? Do you have questions about any of the information that is shown? If you do or if anything seems amiss, now is the time to contact HR so that you can straighten out any errors.
  • 1099’s – There are a whole slew of potential 1099s that you can get. The most common are 1099-INT or DIV which come from your investment and bank accounts. There is usually also a section with the 1099-B if you sold any securities during the year. 1099-R means that you took money out of an IRA or other retirement account. 1099-G is the form that you will get if you got a state income tax refund in the prior year. 1099-MISC means that you performed contract work for someone and will likely need to include a schedule C for nonemployee income. Be sure to include all 1099s in your income envelope as there are quite a few other varieties – all of which are important.
  • K-1 – these forms come from being a partner. This will show your share of the income, deductions and credits. Be sure to take a good look and make sure that the ownership percentage and other details appear accurate. If you have questions about the information that appears, be sure to contact the managing partner to get details or clarification.
  • Include any other forms or details of income that you received during the year.

If you have your own business, you will want to include a complete financial statement from the business. Label a second envelope “Business” and include all of the details from your business.

  • If you use your car for business, make sure you have a mileage or other log to show the business miles driven, including who you met with (or the activity performed), dates and the mileage to and from. If you didn’t have a great log last year, now is the time to set one up for 2016!

I’m sure you got other forms in the mail that relate to potential deductible expenses as well. Be sure to label another envelope “Deductions” and include all of those things. I’ll go into more details on those items another time, but, for now, set aside a few minutes and get all of the income pieces of your tax return organized. It doesn’t have to be an overwhelming task if you take it piece by piece and knock it out a bit at a time.

We know how fast the year is speeding along, and April will be upon us in the blink of an eye so avoid the stress and get yourself organized now. You’ll be glad that you did.

To our financial (and tax) success!