Federal Tax Rates for Self-Employment
Self-employment offers many advantages over working at a job with a traditional employer-employee relationship. Business owners, independent contractors and other self-employed workers can choose their own hours, work as little or as much as they like and control how they complete their work. On the other hand, employed workers share the burden of paying Social Security and Medicare taxes with their employer while self-employed workers must pay the entire tax themselves.
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Federal Self-Employment Tax Rate
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The federal self-employment tax is imposed on workers who make more than $400 during a calendar year from self-employment. When you work a normal job, your employer takes some money out of your paycheck to pay the Internal Revenue Service (IRS) your income tax and the amount you owe for Social Security and Medicare. In general, any income you earn that does not have taxes withheld by an employer is self-employment income. The IRS states that self-employed workers are people that "carry on a trade or business as a sole proprietor or an independent contractor" as well as members of partnerships. According to the Social Security administration, the SE tax is 15.3 percent in 2010.
Social Security Tax Rate
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The SE tax is made up of two parts, a tax that goes toward Social Security and a tax that goes toward Medicare. The portion of the tax that goes toward Social Security is 12.4 percent as of 2010, according to the SSA. Tax legislation passed by Congress in December 2010 will, however, change the Social Security portion of the SE tax. CBS states that a payroll tax cut will take effect in 2011 which reduces the amount all workers have to pay toward social security. This means self-employed workers will only pay 10.4 of income and the total SE tax rate will fall to 13.3 percent.
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Medicare Tax Rate
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The portion of the SE tax that goes toward Medicare makes up the final 2.9 percent of the SE tax. This tax rate is not set to change as a part of the December 2010 tax bill. The SSA states that the Social Security tax only applies to the first $106,800 of income. The Medicare tax rate applies to all income earned.
Considerations
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If you are self-employed you are required to pay the SE tax by sending quarterly estimated tax payments to the IRS. Payments can be sent via mail or made online using a special electronic submission service. It is important to keep accurate records of all tax payments made throughout the year so that you have all the information you need to file your tax return at the end of the year.
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