Costs of Business Ownership
Costs of Business Ownership: Self-Employment Taxes | Written By: Michelle Campbell
As business owners, we are in a unique position to create wealth and be the masters of our own destinies… but not without inherent costs. This article is the first in a series that will bring to light some outlays that catch some newbies by surprise. Use them to prepare for eventualities if you are to continue on your self-employed journey.
One such cost is the increase in taxes that are so unexpected by the typical newly self-employed person. Prior to our lives as entrepreneurs, our employers withdrew taxes from our paychecks and that’s all we knew. We were in compliance with the IRS. Not so anymore. We now have a front seat to what actually happens. So not only are we, as a business owner, liable for income tax – the same as all employees – we are now responsible as an employer.
The typical sole-proprietorship or single-member LLC will complete a Schedule C that includes all cash-basis revenue and expenses for the year. And then, you must complete a Schedule SE, which calculates how much you owe for Social Security and Medicare. You are no longer paying the 50% while your employer pays the other portion, you are now paying the full 15.30% as a self-employed entity. The them is now you! Take heart… there is the 50% deduction for self-employment tax on form 1040.
Self-employment income includes, but is not limited to:
- Income from a home-based business
- Income from a business you own, unless payroll taxes have already been deducted
- Income from freelance work
- Any income for which you are paid as an “independent contractor”
- Any other untaxed earned income
Any earned income up to $118,500 is subject to the Social Security portion of the self-employment tax and all of your earned income is subject to Medicare taxes. So, if you earned more than $118,500, only that portion is subject to Social Security tax.
For information on how I can help you with your business and personal taxes, please visit timevalueaccounting.com.