If you’ve got the entrepreneurial bug and are ready to launch your own business, you’ve got a lot of decisions to make. Corporate structure (or lack thereof), name and branding, product development, marketing, sales, location, and management are just a few of the many things you have to consider. On top of that, you’ll need to keep in mind your self employed tax.
What is Self-Employment Tax
The Self-employment tax is a self-employed persons’ version of Medicare and social security tax. Regular wage earners, or W-2 employees, split these taxes with their employer. Because self-employed people are essentially the employer and the wage earner, they are responsible for the full tax payment. A big benefit of being self-employed though, is that up to 50% of this expense could be tax deductible. It’s always recommended that you seek professional tax advice to find out what you can do.
Who Has to Pay?
The IRS keeps the answer to this question surprisingly simple. According to their website, business must pay self-employment tax if either of these two situations are applicable:
– Net earnings from self-employment exceed $400 (excluding church employee income)
– You had church employee income of $108.28 or more
How to Pay the Tax
For most self-employed, they must file and pay estimated taxes using very specific IRS guidelines. These taxes are usually paid quarterly, and if you overestimate your taxes, you’ll get a refund. If you underestimate, then you’ll owe money at the end of your fiscal year. Again, you’ll always want to have a tax professional available for advice. They’re worth their weight in gold. There are also several accounting software programs and online bookkeeping options to help keep your tax material organized and on-time.
Is this the Only Tax to Pay?
This is an important point: Self-employment Tax is not a substitute for all the other taxes your small business may have to pay. Self-employment tax only covers the Medicare and social security aspect. Income tax must still be paid as required.
How Much is the Self-Employment Tax
Thanks to the 2010 Tax Relief Act, self-employment tax is temporarily down 2% to 13.3% as of this writing. The IRS website is typically kept current on any changes and your tax professional will likely know the rate in any given tax year. Depending on tax code, legislation, etc. these self-employment tax rates can change.
Is it Worth it?
The tax ramifications of starting a small business can sometimes be daunting. Just know that there are professionals in every field you need that often want to share their knowledge and help you succeed. Small business and the entrepreneurial drive have boosted both micro and macro economies across the world. If you have an idea or a passion you want to pursue, then the answer to the question, “Is it worth it?” is an easy one. Sometimes, even without passion or interest, the idea can be so big (and profits so large), that the path you need to choose is obvious. Go for it! Don’t let the taxes and bureaucratic jargon keep you from realizing your dream. Lawyers, Accountants, Engineers, Designers, Analysts, Advertisers- Anything you could possibly need to make your business a success already exist and are at your fingertips.