TAfter 10 years in our current location, watching the once sleepy NE neighborhood fully awake from its ungentrified slumber, we are now making plans to move this coming spring and with that move, marking the end of the Gallery @ Fox Tax. To celebrate and reminisce on the last 10 years of art events, we will be stuffing the walls to the brim with work from over 20 of our most illustrious alumni in a jam-packed 10 year retrospective extravaganza! Opening reception will be held on January 14, 2017 from 6 to 10 pm.
Self-employment tax is the equivalent to Social Security and Medicare taxes that employees have withheld on their paychecks. As there are no withholdings on self-employed income, the Social Security and Medicare tax is calculated along with one's federal tax on the annual income tax return.
An employee has 7.65% of their wages withheld for Social Security and Medicare. Every employer also matches this dollar amount, making the total Social Security and Medicare paid equal to 15.3% of an employee's wages.
As a self-employed individual is both the employer AND the employee, the IRS makes the Self-Employment Tax double the rate withheld from employees, or rather the total 15.3%. However, instead of being calculated on gross wages-as in the case of an employee-Self-Employment Tax is based on net earnings from self-employment. This means that all business expenses are deducted prior to calculating the 15.3%, thus making the tracking and deduction of business expenses that much more valuable.
As an employee, your take-home pay is always much less than your gross pay. This is because your employer withholds federal, state, Social Security, and Medicare taxes (as well as other things like insurance, benefits, etc.).
When self-employed, there are no taxes withheld. As our government is set up on a pay-as-you-go (never plan further ahead than your re-election) plan, rules have been established requiring us to pay our taxes as we earn our income. So for a self-employed individual-with no withholdings from income-the government wants you to pay "Estimated Payments", due each quarter on the income that you have earned.
The IRS has set up rules to determine whether or not you are supposed to pay in your taxes on a quarterly basis during the year (or pay a penalty for failing to do so). There are several factors. First, if your total federal tax bill is under $1,000 for the year, you are not required to pay quarterly. Next, if your annual tax liability exceeds $1,000, then you are required to pay estimated taxes equal to the lesser of: a) 100% your previous year's tax or b) 90% of your current year's tax.
Failure to properly estimate and pay your taxes may result in a 4-5% annualized penalty (calculated on exact number of days underpayment is late-usually the total penalty does not exceed 3% of total underpayment).
If your self-employed income is rather stable or steadily on the rise-isn't that the goal?- a good rule of thumb is to take the prior year's tax, divide by four, and mail a check for that amount each quarter with Form 1040-ES.
If your self-employed income is unreliable and cash flow is an issue, you may want to skip the estimated payments altogether or send one only when you receive a large in-flow and can afford to pay your tax.
Even if you skip all the estimates and do incur a penalty, it usually does not exceed 3% of the tax, which is a pretty good rate for a loan. It's not advisable to get so far behind that you cannot afford to pay your taxes, but if you have short term debts at high interest rates, i.e., credit cards, it may be better to skip the tax payment and focus on paying off your debts.
Every situation is different and the above is generalized information. For specific advice or help calculating your estimated taxes, feel free to contact Mark or Alyssa at 612.824.2829 or firstname.lastname@example.org. You may also find more information on this subject in IRS Publication 533, Self Employment Tax.