A brief guide to self-employment tax
Need to complete your end of year tax return? Here’s a brief guide to self-employment tax.
If there’s one thing we all know, it’s that filing our taxes comes round like clockwork. And unlike employees, whose W-2 forms are submitted by employers to automatically deduct tax, when you’re self-employed your taxes are not taken from your salary. Instead, you are required to submit a 1099-NEC tax form.
Whether you’re a newcomer or someone who hates thinking about tax, let us give you a brief introduction to some of the things you need to know about self-employment tax.
Understanding tax forms
As we’ve touched on already, you’re going to need to file your own tax forms. A 1099-NEC tax form is required for you to report self-employment income and is for “business that makes nonemployee compensation payments totaling $600 or more”.
Generally, these forms need to be filed before January 31. It’s also important to note that there are no automatic 30-day extensions to file. There is, however, the possibility to extend if the business meets “certain hardship conditions”.
What does ‘self-employed’ cover?
If you’re wondering who is classed as “self-employed” the IRS splits this into three categories. So, you’re self-employed if:
- You carry out a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business).
How much do I need to pay in self-employment tax?
For 2020, self-employment taxes are roughly 15.3% and this includes Social Security and Medicare – 12.4% is towards Social Security, and 2.9% is to Medicare. You should look at putting money aside each month to ensure you have enough to cover the tax when it’s due.
Your tax brackets will help you determine your tax rate. But as a guide, you will need to take your gross annual income and deduct any above-the-line deductions. Bear in mind that you only pay Social Security on the first $137,700.
All above that is exempt and the salary threshold is subject to change each year. When it comes to Medicare, salaries over $200,000 a year are taxed at 3.8%.
Don’t forget deductions
As you are self-employed, you will need to pay as both the employer and the employee – meaning you pay more in taxes. To balance this higher tax rate, you get to make more deductions and cuts. The most common deductions include:
- Educational materials and expenses
- Travel expenses
- Office supplies and equipment
- Licenses and permits
- Advertising and any other promotional materials.
Don’t put it off!
Filing taxes may seem a little confusing, especially if this is your first time in completing the necessary paperwork. But, don’t worry. Millions of people go through this process every year and you’ll soon get the hang of things.
Don’t put the task off – attack it positively so that you can rest easy knowing that your obligations have been fulfilled.