Tax season is here which for many is just a synonym for stress season. Filing taxes is complicated and going through new forms for your taxes can be extremely frustrating. So frustrating, that many people would just prefer talking to a tax expert and allowing them to do their taxes (great option for many, we might add!). Many that try to file for taxes themselves, are constantly stressed out about what options to select on your W2 or other related forms. One incorrect option, and you could get a surprise next paycheck or next year when you have to pay more taxes. While everything tax related can be stressful, self-employment taxes can be even more frustrating. Self-employment taxes are not like employee taxes, a lot more is involved when it comes down to declaring income, assets, and understanding state and federal tax.
The baseline to making sure you are doing your taxes right is to begin by really understanding what really goes into taxes and what that means for you. Below are great questions that most small business owners have when it’s time to sit down and do taxes. Remember these are only suggestions and you should always consult with a tax expert for their trained expertise.
Paying Taxes As An Employee
A W-2 employee is a person that has a job working for someone else. The employer pays the employee a salary and legally has to comply with certain laws.
For instance, the employer has to pay payroll taxes – known as FICA – which mandates that the employer pay Social Security and Medicare tax.
The current FICA tax rate is 15.3% – half is paid by the employee (through paycheck withholding) and the other half paid for by the employer.
Likewise, if you own a business and also have paid employees (not contractors, but employees), you would need to pay your half of each employee’s payroll taxes.
In addition to FICA payments, each employee pays federal, and if applicable, state, and local income taxes for the year.
Paying Taxes Is Different When Self-employed
How are self-employment taxes different then? There are several different ways you can be self-employed: as a contractor, freelancer, a corporation, a sole proprietor, or with a partnership.
Technically, a contractor’s wages are recorded on a 1099 form for tax purposes. A freelancer may or may not receive a 1099. Other individuals may just be paid in cash. At the end of the day, it doesn’t matter. All of the above individuals (or partners) are considered to be self-employed.
Therefore, they have to pay the self-employment tax, which is currently 15.3% (12.4% for social security and 2.9%).
Save much more than the 15.3% however. Experts recommend saving at least 30-35% of your earnings just for taxes because in addition to the self-employment tax, business owners are responsible for federal, state, and local income taxes (as applicable).
Who has to pay self- employment taxes?
Anyone with more than $400 in earnings in a calendar year from self-employment must file the appropriate self-employment taxes.
If you meet the requirements, here are the self-employment tax forms you will need.
Individuals, sole proprietors, partners, and S corporation shareholders will generally use the 1040-ES form for filing taxes.
Additional forms may include 1099-A, 1099-MISC, 1099-R. If you are filing for a loss, you will use 1040-Schedule C.
What if I am both an employee and a business owner, what taxes do I pay?
If you have both W2 as well as self-employed income, you will have taxes withheld from your W2 job, and you will need to make quarterly payments of 15.3% of adjusted gross self-employment income.
At the end of the year, you will pay income taxes on your entire adjusted gross income for the year. However, different income types are taxed at different rates.
For example, income from a rental property is taxed differently from W2 income, which is taxed differently than dividend income.
Don’t forget to factor in the standard deduction and also investigate ways that you can reduce your tax burden. Again, this is when a tax expert is worth their weight in gold.
Steps for paying Self-Employment Taxes?
If you qualify for self-employed taxes then the next steps are as follows:
- Calculate what you owe in taxes. We made a similar blog that explains how to calculate taxes as a business owner.
- Gather the correct forms. Many tax forms we have provided above, you are welcome!
- See if you also qualify for employee taxes, and if so make sure to have your employer provide a W2.
- Make sure you file your taxes on time. Small business owners do pay taxes more frequently so consider yourself warned!
- Pay your taxes! IRS made this extremely easy as you can now pay via the IRS.gov website, electronically online, by phone, or send it by mail.
- Contact a tax expert if you still find yourself lost, no shame!
Remember that tools are always available online and the IRS also have customer support so take advantage wisely!