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What Are Your Self-Employment Taxes?

Even if you don't hire anyone else to help you run your business, you're always going to have at least one "employee," and that would be yourself. So, what kind of payroll tax obligations do have with respect to yourself?

Well, if you happen to run your business through a corporation, you're likely to have all the same obligations you would have if you actually hired another employee. This is because corporations are treated as distinct legal entities from their founders and shareholders. In other words, a corporation that you form and of which you are the sole shareholder can nonetheless be your employer for payroll tax purposes. Whether your corporation is a C corporation or an S corporation, you'll pay payroll taxes on your salary.

But what if you don't incorporate? For starters, you aren't considered your own common-law employee. So you won't have any of the general payroll tax obligations that come with hiring employees. However, you will have some close substitutes. For example, although you won't have to withhold income taxes from the income you draw from your business, you may have to make quarterly estimated tax payments.

Furthermore, if you earn at least $400 a year from your business, you'll have to pay self-employment (SECA) taxes. In essence, self-employment taxes are like FICA taxes that are imposed on folks like you who are in business for themselves. Like the FICA taxes, the self-employment taxes consist of a Social Security tax and a Medicare tax. The initial rate is 15.3 percent, with a Social Security rate of 12.4 percent and a Medicare rate of 2.9 percent. In other words, you have the same rates you would get by adding the employer and employee portions of the FICA taxes together. A 7.65 percent deduction is allowed (i.e., one-half of the (12.4 Social Security rate plus the 2.9 percent Medicare rate).

The amount of income subject to the Social Security rate ($113,700 for 2013; $110,100 for 2012) may be adjusted each year for inflation.

For tax years beginning after 2012, a 0.9% Additional Medicare Tax also applies to self-employment income exceeding a threshold amount ($250,000 for joint return, $125,000 for separate, and $200,000 in any other case). There is no deduction with respect to the 0.9% Additional Medicare Tax, but it is coordinated with the FICA tax in determining the threshold amounts.

For sole proprietorships, partnerships, and limited liability companies, the self-employment taxes are imposed on your net self-employment income, which basically is just your business income reduced by your business deductions.

You report the tax on your annual federal income tax return, on Schedule SE.

Business Tools

Among the Business Tools are Form 1040 and Schedule SE. They are in Adobe Portable Document Format (.pdf), and you will need the free Acrobat Reader to view and print the file.