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self employment tax

No one holds your hand when you’re running your own business. The government expects you to stay on top of tax policies and regulations, so “I didn’t know” is not an acceptable explanation for a no-nonsense government auditor. Self-employed workers have even more tax responsibilities than a typical W2 wage earner, including self employment tax.    

Most business owners need to declare their income and report self employment taxes on their annual tax returns, In many cases, they must also make quarterly payments towards their estimated tax bill throughout the year. Keep reading to find out everything you need to know about self-employment taxes for online sellers.

What is Self Employment Tax?

When you work as an employee, your employer withholds taxes from your paychecks. A portion of the tax goes towards payroll taxes for Social Security and Medicare. However, your employer also pays Medicare and Social Security taxes on your earnings, and the amount coming out of your check only represents the employee portion. Self-employment tax includes both the employee and employer portion of these taxes, so the effective tax rate is actually higher than it is for a WE2wage earner.   

Self-employed workers don’t have an employer, so no one withholds taxes from their checks. However, you still need to pay these taxes on your own. The self employment tax includes both the employee and employer portions of Social Security and Medicare taxes. 

How Much is Self Employment Tax?

The current self-employment tax rate adds up to 15.3% and covers both the employer and employee portions of taxes that are typically deducted from paychecks. 

The self-employed tax rate consists of a 12.4% tax for Social Security and a 2.9% tax for Medicare combined. You must pay self-employment taxes if you make $400 or more during the course of the tax year. Oh 

How to Calculate Self-Employment Tax

Once you know your gross income and expenses, you can easily calculate your self-employmenttax bill. 

First, deduct expenses from gross income to determine net income. Now, take the figure and multiply it by 0.153 to find out your total self-employment tax bill. It’s that easy. 

self employment tax rate inforgraphic

Are Self Employment Taxes Deductible?

You can deduct the employer portion or your self-employment tax expense on your tax return. These deductions can add up to substantial tax savings, so don’t miss out on it. 

Self Employment Tax Calculator

 A self employment tax calculator can help you determine your total self-employment tax bill in a flash. All you have to do is input a few basic figures, and it will spit out your total tax costs for the period. 

Click here to access a great self-employment tax calculator from our friends at SharedEconomyCPA.com. 

How to Pay Self Employment Taxes

Calculating your tax bill is tricky, but the Internal Revenue Service makes it easy to pay the tab. The IRS offers various payment options so you can choose whichever way you prefer.

The first and most convenient method is to pay the IRS directly online. If you’d rather do it the old-fashioned way, you also have the option to by mail. Finally, you can pay in-person at participating IRS and PayNearMe locations.

Online

The best way to pay your taxes is online. It is safe and secure and easy to access. Simply create an account on the IRS website. Once you have created an account you can pay your taxes and set up an installment plan if you need more time to pay your tax bill. 

By Mail

If you’d rather pay your taxes the old-fashioned way,  you can send a personal / business check, money order, or cashier’s check to the IRS. Make sure the payment includes your full name, address, phone number, and social security or tax ID number. You should also include the tax year, plus any related citation or notice numbers. 

Different regions send their payments to different addresses, so make sure you have the right one before you send out the payment. 

Click here for a state-by-state list of IRS addresses.

Estimated Taxes

Self employment taxes can be submitted with your estimated taxes which represent the rest of the withholdings and employer would have withheld from your paycheck. The IRS doesn’t want to wait until tax day to collect, so they ask for payment in the form of estimated taxes, also known as quarterly taxes. If you expect to owe more than $1,000 in taxes, you will need to pay estimated taxes.

Quarterly Payments

Some taxpayers must submit estimated tax payments every quarter. The deadlines for quarterly payments typically fall on April 15, June 15, September 15, and January 15. 

 If you expect to exceed the threshold for estimated tax payments, you must pay them on time to avoid unnecessary penalties. If you overpay, the IRS will issue a refund after you file your tax refund. 

How to Reduce Self Employment Taxes

Don’t want the headache of calculating and paying additional taxes? There are a couple of strategies you can use to lessen or even eliminate your self employment taxes.

Get a W2 Side Job

If you want to avoid paying estimated taxes you can get a W2 job. You can increase your employer’s withholdings to cover your self employment tax. Talk to your tax advisor about how many exemptions you should claim. 

Don’t Miss Deductions

Don’t overlook any potential deductions that can help lower your tax burden. For example, section 179 allows taxpayers to deduct the cost of certain types of property when the property is placed in service. This can apply to machinery or equipment used in your business.

home office deduction

If you have a designated workspace at home, you can claim the home office deduction for substantial tax savings.

Claim the Home Office Deduction

You can claim $5 for every square foot your home office occupies up to a maximum of 300 feet for a maximum write-off of $1,500 under the simplified method. However, you can deduct even more if you itemize and pro-rate your costs. 

It can be difficult to determine which method is the best option, so consult with a tax advisor to ensure you’re making the right move. Whatever you do, don’t over embellish. The IRS is particularly suspicious of large deductions for home office expenses.

Also, make sure your home office is an actual office or designated area with the sole purpose of conducting business. A little nook of your kitchen counter doesn’t count. 

Save for Retirement

You can deduct up to $6,000 for qualified contributions to an IRA account. Best of all, these deductions come off above the line, so you can claim them without itemizing. 

 You can contribute to your IRA until April 15 of the next calendar year so you have until April 15, 2021, to make deductible deposits for 2020’s tax return. 

Consult with a Tax Advisor

Tax advisors can help with a lot more than routine bookkeeping and tax prep.  These financial professionals have extensive expertise on a variety of business and accounting topics, and they can assist you with a wide variety of complex financial tasks.  

Talk to an eCommerce Tax Planning Specialist

 Don’t let the government railroad you with unnecessary taxes. Sign up for a tax planning strategy session with a Tax Hack pro to ensure you’re taking advantage of every available discount.  Keep more of what’s yours with a customized, tax strategy session today. 

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