Self Employed Basic Breakdown

Self employed income is generally money received if you carry on a trade or business as a sole proprietor, independent contractor, member of a partnership, or otherwise in business for yourself according to the IRS. Below is a list of tools that will help you understand your situation as a self employed person.

Self employed persons have to be two types of tax.

1. Self employment tax.

2 Federal Income tax.

Self employment tax consists of the Social security and medicare tax that you primarily see on your W-2 form under box 4 and box 6. The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

One half of the Self employment tax is able to be deducted on your tax return. Keep in mind that this does not reduce the tax dollar for dollar, it is simply a deduction to income.

Federal income tax is assessed based on the taxpayer’s income level. You can use this link here to check your tax based on your income level. To use the table you need to know your taxable income and filing status.

How does one manage paying all those taxes at the end of the year? The IRS allows for self employed individuals to pay estimated taxes throughout the year. Typically these payments are broken up into 4 parts for the year. Use this tool to make a direct payment to the IRS.

Being self employed does have its benefits aside from not having a creepy boss breathing down your neck. As a self employed person you get to enjoy the benefits of deducting expenses that are ordinary and necessary to your business. The IRS states that an ordinary business is both common and accepted in your industry. A necessary expense is one that is helpful and appropriate to your business. These definitions are vague and in the event of an audit it is up to the taxpayer to prove the expenses are ordinary and necessary.