Self-Employment Tax
by: Matt Bacak
Who must may self-employment tax? If you are self-employed, you will be responsible for self-employment tax. For the purpose of determining self-employment tax, you are self-employed if you are a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself. As a self-employed individual you will have a Schedule C to attach to your Form 1040, and self-employment tax is computed on Form 1040, Schedule SE. Individuals must pay self-employment tax is they have net earnings of $400 or more. They are several sources of net earnings that are used when figuring your self-employment tax liability. In most cases, net earnings include net profit from a farm or nonfarm business. If you operate more than one business, your net earnings from self-employment are the combined net earnings from all your businesses. If you have a loss in one business, it reduces the income from another. Self-employment tax is the self-employed individual's contribution to social security and Medicare taxes. The only difference between the employee and the self-employed is the employee's social security and Medicare taxes are paid half by the employee and half by the employer. When an individual is self-employed, he/she is responsible for the entire amount.
There are alternative methods that can be used for figuring liability of self-employment tax. The Farm Optional Method and the NonFarm Optional Method may qualify an individual to claim a larger Earned Income Credit or Child Tax Credit. They may also, however, increase your self-employment tax liability.
The maximum amount of earnings subject to self-employment tax is currently $87,000.00 and when figuring your adjusted gross income on Form 1040, you may deduct up to one-half of your self-employment tax liability. If you are member of the ministry or clergy you may request an exemption from self-employment tax from the IRS.
In summary, if you are self-employed, have net earnings of $400 or more, and file a tax return, you will be subject to self-employment tax. To learn more about individual liabilities, exemptions, and alternative tax methods, please visit the online site for IRS Forms and Publications at www.IRS.gov . Topic 554, Publication 517 and 533 will provide more detailed and situation specific information.
About The Author:
Matt Bacak became "#1 Best Selling Author" in just a few short hours. Recent Entrepreneur Magazine’s e-Biz radio show host is turning Authors, Speakers, and Experts into Overnight Success Stories. Discover The Secrets http://promotingtips.com
March 2006
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