If you are running a venture of your own, you need to pay taxes and file the income tax return. As a businessman, you need to know the essentials of finance and taxation is very important part of it.
As a self employed person, you have many advantages over others who are doing job somewhere. As a self employed person, you enjoy freedom of working hours and other stuff but when it comes to taxation, it is a bit complicated for you. You have to consider multiple things while calculating your self employment tax. If you have never calculates your self employment tax before, it will be a little difficult but it’s not rocket science.
Self Employment Taxes
First of all, you are a self employed person and you don’t have any amount deducted from your income as tax deduction at source. In self employments, where you are the owner, no provisions are normally made for taxes or for Social Security or Medicare. In case of employment, company pays the same amount as the employee pays for provident fund and other provisions. In the case of self-employment, entire amount of Social Security and Medicare taxes have to be paid by you which is known as self-employment tax.
Self employment tax is separate from state and federal income tax rates as an addition to it. You have to pay self-employment tax in addition to your regular income taxes. It doesn’t matter whether you are receiving Social Security benefits or not, you have to pay the self-employment tax and it is applicable at any age.
What Is Self Employment Tax Rate
The self employment tax rate for 2012 is 13.3%. (10.4% for Social Security tax and 2.9% for Medicare tax).
The self employed tax rate is down currently because of the Payroll Tax Cut. Once it expires, the self employment tax rate (without the payroll tax cut) will return to 15.3%.
How to Calculate Self Employment Tax
It’s very easy, so no need to worry. you are responsible for paying self-employment taxes once your net earnings out of self-employment are at least $400 (or church employee income of at least $108.28).
- Determine your net income - First of all calculate your net income through accounting process. Calculate your revenue and deduce the expense occurred for business. You will get work related expenses as deduction from your tax, that means you don’t need to pay tax on the money that you have spent for business.
- Calculate Net Earnings from Self Employment - Multiply the net income by 92.35 percent.
- Calculate Self Employment Tax - Any income less than the social security wage base, multiply the amount by 13.3%. For any amount over the wage base, multiply by 2.9%.
- Add these two figures to arrive at your self employment tax.