Do You Owe Self-Employment Taxes?
- October 20th, 2014
- Comments Off on Do You Owe Self-Employment Taxes?
If you own your own business and operate it entirely by yourself, without any employees, that means you’re not responsible for paying payroll taxes, right?
A common misconception amongst self-employed business owners is that without employees, they don’t have to pay payroll taxes, but what they often don’t realize is that they do have an employee: themselves! If your business has even one employee (in such cases, the business owner himself), the business has to follow a set of payroll tax rules. But which self-employment taxes are you responsible for paying, exactly?
How Self-Employment Taxes Are Determined
The type of self-employment taxes that you owe depend on the structure of your business. For example, for tax and legal purposes, corporations operate as independent entities, not connected to the business owner’s personal records or assets. As such, the corporation is typically liable for the same tax obligations as a company would be if it hired an actual employee. That means that despite the fact that the corporation’s owner is the sole shareholder, the corporation is considered his employer for tax purposes. Therefore, he would be responsible for paying the employee share of his FICA taxes, and the corporation would pay the employer share.
Not every self-employed business owners incorporates his business; in fact, it’s probably safe to say that most don’t! So what about the business owners who choose different business structures? Although you won’t have to pay general payroll taxes on your income, because you’re not considered an employee at your company, you will be liable for very similar alternate taxes.
As a self-employed owner of a sole proprietorship, partnership, or limited liability company, you won’t have to withhold your own income taxes, but in many instances you will have to pay quarterly estimated tax payments, similar to the way independent contractors are taxed. Additionally, if you make more than $400 from your business annually, you’ll be responsible for paying self-employment (SECA) taxes. These are the self-employed version of FICA taxes, basically. SECA taxes are based on your net self-employment income, which is typically found by subtracting your business deductions from your business income.
SECA taxes incorporate the same taxes as FICA—Social Security, “regular” Medicare, and the high-income Medicare surtax—but for both the employer and employee contributions. That means the initial tax rate is 15.3% of the total income; 12.4% for Social Security and 2.9% for Medicare. However, the self-employed qualify for a deduction that essentially recoups the employer’s portion of the income taxes. Additionally, there’s a cap for how much of a self-employed person’s income will be subject to Social Security taxes (for 2013 it was $113,700, and for 2014 it was $117,000; this rate is adjusted for inflation annually). There is not a cap for the amount of a self-employed person’s income that will be subject to the Medicare tax. Lastly, as of 2013 there is an additional Medicare surtax imposed on individuals with earnings that exceed $200,000, and combined earnings of $250,000 for couples who file jointly.
Still have questions about self-employment taxes and how they affect you and your business? Call the tax professionals at JRH & Associates at (516) 794-5752 today!