Who is Self-Employed?
Self-employed are people who choose to employ themselves and do not work under an employer. U.S. laws consider a person self-employed when they are running his business as a sole proprietor, independent contractor, a partner in a firm or in a Limited Liability Company. In this post, we’ll discuss self employment tax norms and provide an overview for the classification of self-employed persons.
Self-Employment Tax Rate
Self-employment tax rates are essentially divided into two parts with a share for social security and Medicare. The legitimate expenses incurred solely for business purposes are allowed to be deducted from the gross receipts of business. The tax rate applicable to the Medicare portion is to be provided, regardless of quantum of income but is not payable on losses. The income is adjusted by multiplying it with a factor of 92.355 to accommodate the share of taxes which are deductible as a business expense. The social security tax is payable on first $117,000 earned (as per 2014 Rules). In 2013, a new tax termed as Additional Medicare tax was introduced at 0.9%. Assesses are required to pay in form of Advance Tax if the estimated liability for the year under consideration is expected to cross $1,000.
Deductions:
To calculate an employer equivalent deduction for a self-employment tax, adjusted income must be calculated. This adjusted income is the basis in determining the employment portion in a self-employed tax.
- A deduction equivalent to the amount spent for health insurance.
- Contribution to Pension Plans, namely SEP-IRA, are also eligible as deductions
- Deduction equivalent to contributions made in solo 401(k) are also eligible
Provisions regarding sources of income and losses
While preparing your tax return, you must be cautious about your income generated from various sources. The different sources of income as specified are:
- Income from Business Activities (Schedule C)
- Income from Farming (Schedule F)
- Earnings as a partner (Schedule E)
The self-employed persons who are facing losses in the current year fail to build up their points required to maintain their social security retirement or disability benefits. Therefore, there is a little privilege given to such persons so that they do not fail to build their points. There is a method called the Optional Method under which despite of losses the person can pay the self-employed tax and thus can accumulate the necessary credits. This scheme can be availed innumerably by farmers and fishermen but the other persons can avail it only five times in their lifetime.
At Abbo Tax, you can find relevant information related to taxes for those who are self-employed and be provided with worthy advice which can benefit you in legal tax manners. For more detailed discussions, inquiries, advice and updates on this matter, visit us at www.abbotax.com.