Self-employment tax is the bane of existence for many sole proprietors. And it’s often a surprise to people who are new to self-employment — they file their tax return and find out that things often turn out much differently when you’re self-employed.
Question from a web visitor: why is the deduction for 1/2 of self-employment tax taken on the front side of the 1040 and not on the proprietorship’s Schedule C?
So why does the IRS care so much about employee vs. contractor? Two reasons. One is the penalties they can collect. The other reason is they usually collect more taxes when someone is treated as an employee, because a contractor can take business deductions which directly reduce taxable income.
The answer is yes, you have to pay self-employment or FICA taxes.
There is one exception, where a person can opt out of paying these taxes (but this means not receiving benefits later on). This exception only applies to members of the clergy and members of certain religious sects.
A question I’ve had in my mind for a long time now is: why is self-employment tax for a sole proprietor based on 92.35% of self-employment income instead of the whole amount? I’ll attempt to explain in this post. SE Tax vs. FICA Tax FICA taxes are withheld from employee wages and fund the employee’s […]
Here’s a basic overview of the self-employment tax calculation for self-employed people. These are the steps for the calculation: Determine your net self-employment income. For most self-employed people, this will be the net profit from their Schedule C. Multiply by 92.35% (.9235). Multiply that result by 15.3%. This gives you the amount of self-employment tax […]