Learning About The Self Employment Tax

Self Employment Tax can come as a major surprise to new freelancers or business owners in the United States who aren't aware that they only actually pay half of their Social Security and FICA taxes when they are an employee. Overall the rate for self employment tax in the United States is 15.3%, 12.4% of which is Social Security and 2.9% for Medicare. Half of these taxes are paid by the employer while a self employed individual is responsible for all of it. Income for Social Security is still only taxable up to a certain amount, which as of 2011 is $106,800. Taxes are a reality of everyday life, and while being self-employed might seem like a dream come true, keep in mind that when it comes to actual take home, $30,000 gross from an employer will be noticeably less take home than $30,000 gross earned from self-employment.  At least being prepared for this will make the transition a little easier.

There are some possible upsides tax-wise for being self-employed, even with the higher tax rate. For example, as one friend put it: "It's relatively easy to be possession-rich as long as the purchases relate to business."  New computers, printers, ink cartridges, pens, postage, etc.  Business lunches are half off and very little documentation is needed to make it a business lunch (just try to keep it under $75 and keep a business journal where you write that it was a business related lunch).  But even beyond that, a few extra % points in paid taxes are worth it to most people to make their own schedules, not deal with a boss, and actually work for themselves.  It's much easier to work a 60 hour week if you are the one receiving direct benefit of the effort as opposed to someone above you who may or may not appreciate your work.

While there are a few exceptions, such as with farmers, most self-employed individuals will need to pay taxes on a quarterly basis. If you don't earn much the first year this isn't quite as important, since you're not expected to be able to accurately predict your income before having a full year under the belt. The exact dates the taxes are due varies from year to year, although in general they are every three months. The IRS website publishes this information for individuals to look up, and includes forms to fill out when sending in payments. If you can, it's better to slightly overpay each quarter rather than take the chance of underpaying.  You don't want to get nailed with penalties.