You may have the same entrepreneurial drive as many in Irvine that compels you to want to be your own boss. Yet the common complaint that our team members here at Ron Cordova Attorney at Law hear from self-employed clients is that they do not understand why they have to pay more in tax. Understanding your tax obligations is vital if you want to succeed at being self-employed, as the threat of penalties from tax improprieties can exact a heavy financial and emotional toll on your business (not to mention endangering your personal freedom).
When you work as an employee, you share the cost of paying the taxes mandated by the Federal Insurance Contributions Act with your employer. Those tax dollars help to fund both Medicare and Social Security. When you are self-employed, you are not subject to FICA regulations, but rather the Self-Employment Contributions Act. This essentially means that you shoulder the burden of paying for both Social Security and Medicare on your own. Per Inuit TurboTax, the Social Security Tax is assessed at 12.4 percent of your first $128,400 of income, after which it stops for the year. The Medicare Tax is 2.9 percent, and it does have a cutoff point.
How will you know if you have to pay the self-employment tax? According to the Internal Revenue Service, if after subtracting your business expenses from your business income you have a net profit of greater than $400, you have to file an income tax return on that amount. It stands to reason that you will need to pay the tax if a majority of your income comes through your self-employment.
You can learn more about your tax obligations by continuing to explore our site.
