Understanding Employment Tax for the Self-Employed

Self-Employed Tax Guide: Key Concepts and Insights

According to the latest figures released by the U.S. Bureau of Labor Statistics (BLS), the number of self-employed people in the United States of America is over 9.6 million. Self-employed individuals generally work as a business, independent contractors, or freelancers. If you are one of them, you must understand how to handle your taxes each year to avoid IRS fines. The best way to ensure not falling prey to the IRS penalty trap is to have sound knowledge of the different tax slabs. If you live in Dallas, hiring our tax attorneys in Fort Worth, TX, can be a good place to start. Consulting a Fort Worth tax lawyer will not only help you stay updated with the ever-changing tax norms, but also enable you to avoid financial and legal complications. Before you hire an IRS tax lawyer, read this blog to understand the concept of employment tax for the self-employed. Let’s get started.

What is the Self-Employment Tax?

The term “self-employment tax” refers to taxes that self-employed individuals and small business owners pay to the federal government to fund Medicare and Social Security. Self-employment tax can be compared to FICA tax, which is paid by employers under the Federal Insurance Contributions Act. The tax is calculated and reported on Schedule SE of IRS Form 1040. Self-employed people who earn less than a specific amount are exempt from paying such a tax. 

When to Pay the Self-Employment Tax

The IRS states that individuals must pay self-employment tax and submit Schedule SE (form 1040) if either of the following situations applies to them:

  • They made more than $400 in net self-employment income.
  • They earned at least $108.28 as a church employee.

In such circumstances, the self-employment tax amount will be levied on all of your combined wages, tips, and other earnings from self-employment during the current year. If you are not sure how much tax amount you are supposed to pay, consult tax attorneys in Fort Worth, TX.

The self-employment tax rate for 2022-2023

The self-employment tax rate for the current financial year is 15.3% of net earnings. This rate is made up of a 2.9% Medicare tax and a 12.4% Social Security tax on net income. It’s worth noting that self-employment tax is different from income tax. Here are the self-employment tax rates for 2022-23:

  • For the 2022-23 financial year (FY), the first $147,000 of your earnings is subject to Social Security. In FY 2023-24, it will rise to $160,200.
  • A 0.9% additional Medicare tax may also apply in case your net earnings from self-employment endeavors exceed $200,000 (if you’re a single filer) or $250,000 (if you’re filing jointly).

Here are the applicable threshold amounts based on different filing statuses. 

Filing Status

Threshold Amount

Married filing jointly

$250,000

Married filing separate

$125,000

Single

$200,000

Head of household (with qualifying person)

$200,000

Qualifying surviving spouse with dependent child

$200,000

Understanding the Mechanism of Self-Employment Tax

The self-employment tax mechanism targets individuals classified as self-employed, who do not have withholding taxes deducted. This category encompasses sole proprietors, freelancers, and independent contractors engaged in trade or business activities. Even a partner involved in a business trade may be categorized as self-employed according to the Internal Revenue Service (IRS). Individuals falling under this classification are obliged to pay self-employment tax to secure future Social Security benefits during retirement.

In the realm of business, both the enterprise and its worker bear the responsibility of contributing to crucial social welfare initiatives: Medicare and Social Security. In the view of the IRS, those who are self-employed are seen as fulfilling both roles, that of an employer and an employee, which necessitates them to cover both portions of this tax. Here’s an overview of the operational process:

The Social Security tax comprises a 6.2% levy for both the employer and the employee, resulting in a 12.4% tax burden (6.2% + 6.2%) for a self-employed individual, recognized as both employer and employee.

This Social Security tax is applicable only to the initial $147,000 of self-employment earnings, leading to a maximum tax of $18,228 in 2022. For the year 2023, the cap increases to the first $160,200 of income, culminating in a total tax of $19,864.80.

Meanwhile, the Medicare tax constitutes a 1.45% charge for both an employer and an employee. Consequently, a self-employed worker shoulders a 2.9% tax burden (1.45% + 1.45%), as they are identified as both employer and employee.

There are no income constraints for Medicare taxes. Thus, the overall self-employment tax rate stands at 15.3% (12.4% + 2.9%).

Illustratively, an individual with a net income amounting to exactly $137,700 in 2022 under the self-employment category would need to remit taxes totaling $21,068.10 ($137,700 × 15.3%).

Self-Employment Tax Deductions

There are deductions and adjustments that self-employed individuals can use to reduce their taxable self-employment income, which in turn reduces the amount subject to self-employment tax. Some common deductions include:

  • Business Expenses: You can deduct legitimate business expenses necessary to operate your business, such as office supplies, equipment, travel expenses, advertising costs, and more.
  • Home Office Deduction: If you use a portion of your home exclusively for business purposes, you may be able to deduct related expenses such as rent, utilities, and insurance.
  • Health Insurance Premiums: Self-employed individuals can deduct the cost of health insurance premiums for themselves, their spouses, and their dependents.
  • Retirement Contributions: Contributions to retirement accounts, such as a Simplified Employee Pension (SEP) IRA or a Solo 401(k), are generally tax-deductible.
  • Self-Employment Tax Deduction: You can deduct the employer-equivalent portion of your self-employment tax when calculating your adjusted gross income, which indirectly reduces your income subject to income tax.

Final word

Whether you are a freelancer, sole proprietor, or independent contractor, it is always advisable to pay your taxes on time. The best way to know how much to pay and when is to seek the services of an experienced Fort Worth tax attorney. The greatest benefit of hiring an IRS tax attorney in Fort Worth, TX, is that they are knowledgeable about recent developments in taxation norms. Besides, having an expert Fort Worth tax lawyer at your disposal would ensure that you never commit mistakes as far as tax filing is concerned. Your search for a “tax lawyer near me” in Texas ends here. When looking for seasoned tax attorneys in Fort Worth, TX, look no further than The Law Offices of Nick Nemeth. We help the Dallas community get the best tax help in Fort Worth for all manner of problems, including unfiled tax help. Our team of highly experienced tax attorneys in Fort Worth, TX, is always ready to discuss your case and render the necessary assistance. To get a FREE, no-obligation consultation, call (972) 426-2553 (Dallas office) or (817) 624-0829 (Fort Worth office). You may also leave us an email at info@myirsteam.com or fill out our contact form, and we will reach out to you. Your tax attorney help is just a few clicks away.

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