The Percentage to Withhold for Self-Employment Taxes?
When you work for someone else, you can count on your employer to withhold the proper amount of taxes. But when you work for yourself, you have no such luxury. As a self-employed individual, you face higher taxes in the form of a self-employment tax. That means you must plan your finances carefully to ensure you have enough in reserve to pay Uncle Sam what you owe.
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Social Security Taxes
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As a self-employed individual, you are responsible for both the employer and the employee share of the tax used to fund the Social Security payments for senior citizens and the disabled. Under normal circumstances both the employer and the employee Social Security tax is 6.2 percent, for a total of 12.4 percent for the self-employed. But for 2011 only, the employee share is only 4.2 percent, making the total tax for self-employed individuals 10.4 percent. This change was part of the tax deal worked out in late 2010, and the tax rate is scheduled to rise to 6.2 percent in 2012. The Social Security tax is capped at $106,800 of earnings, so income above that cap is not subject to the deduction.
Medicare Taxes
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When you are self-employed, you must pay both the employer and the employee portions of the Medicare tax. As of 2011, that tax is 1.45 percent for both the employer and the employee. Unlike the Social Security tax, the Medicare tax does not have a cap, meaning that you must pay that total 2.9 percent tax on all of the money you make through self-employment.
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Tax Planning
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When you are self-employed, you need to do some advance tax planning, since the tax situation for self-employed individuals is quite different than for employees. You can start a dummy tax return using an online tax preparation website or tax preparation software. Once you have that dummy return started, you can simply plug in your income to determine how much you might owe in both income taxes and self-employment taxes when you do file your 1040 form.
Estimated Taxes
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If your advance tax planning reveals that you expect to owe more than $1,000 to the IRS, you might be required to make estimated tax payments on a quarterly basis. It is a good idea to consult with a CPA or other tax expert to determine whether you are required to make these estimated payments, and if so, how much you should pay. If you do make estimated payments, you will need to include those payment amounts when you file your taxes at the end of the year.
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References
- Photo Credit Form 1040 Tax Forms image by Viola Joyner from Fotolia.com
