Understanding Self-Employment Tax

If you plan on working as a self-employed professional, there are tax implications to consider. Before you take this step, it is important to understand the ins and outs of self-employment tax. This means answering three questions:

•    What is self-employment tax?
•    Who is required to pay self-employment tax?
•    How do you pay self-employment tax?

First and foremost, self-employment tax consists of Medicare and Social Security taxes. This is similar to the Medicare and Social Security taxes that are withheld from your pay as a traditional employee.

Secondly, the IRS states that you must pay self-employment tax if either of the following applies to your situation:

•    Your net earnings from self-employment were $400 or more.
•    You received church employee income of $108.28 or more.

If you find yourself in either situation, you are required to file Schedule SE (Form 1040) with the IRS.

While it may sound confusing to pay self-employment tax, this is not the case. As long as you have a Social Security number (SSN) or an individual taxpayer identification number (ITIN), this is simple to do.
Most self-employed professionals pay estimated quarterly taxes. If you need help deciding how much to pay, consult with a tax professional.

At first, it may be confusing to pay self-employment tax. Once you are on the right track, once you make a few payments, everything will come together. Soon enough, you will know what is expected of you and how to ensure that you are paying all the taxes you owe.