Minimize Taxes Now Or Maximize Benefits Later
Should you skip some or all of the business tax deductions youre entitled to increase your future Social Security benefit? Maybe. The answer is complicated because lower-earning business people stand to gain more in the future than their higher-earning counterparts due to how Social Security retirement benefits are calculated.
Another critical factor is where your Schedule C earnings fall compared to your previous years earnings. If you have a full 35-year career behind you and youre not earning nearly as much in your current self-employed pursuits, it makes sense to take all the deductions you can, as your Social Security benefits will be calculated based on your 35 highest-earning years. In this case, you want to minimize your Social Security taxes.
But if youre currently in the high-earning part of your career, a higher Schedule C income can help you get higher Social Security benefits later. Unless you enjoy complex math problems or have a top-notch accountant, its probably not worth the headache to figure out whether youll earn more in future Social Security benefits than youd save by claiming all the deductions you can today.
Of course, suppose youre on the cusp of not having enough Schedule C income to give you the work you need to qualify for Social Security. In that case, it may be worth foregoing some deductions to make sure youre entitled to any benefits at all.
How Fica Taxes Work For Employees
FICA taxes are collected through two channels: the employee and the employer. Hereâs how it works on both ends.â
The employeesâ share of FICA taxesâ
Throughout the year, FICA is automatically deducted from a W-2 employeeâs gross pay and remitted to the IRS in a process called withholding.
Many employees donât even realize theyâre paying FICA taxes! When they receive their W-2s however, the amounts paid in are reported in boxes 4 and 6.
Social Security tax is 6.2%, and itâs assessed on the first $142,800 of earned income. . Income exceeding $142,800 is exempt from Social Security.
Medicare tax is 1.45%, and itâs assessed on all earned income, with no current threshold limits. The combined rate is 7.65%.
The employerâs share of FICA taxesâ
The employer is required to âmatchâ the FICA taxes paid by their employees. This effectively means theyâre paying the same rate, so when an employee hits the maximum taxable threshold for Social Security, the employer also becomes exempt. The employer portion of FICA is an added cost to having employees, so the IRS allows employers to write off their half of the tax. This part is also relevant for self-employed people â more on that later!
What Is My Income For Self
Business owners pay income taxes on their business income in different ways. The business income for self-employment tax purposes depends on the type of business:
- The taxable income of a self-employed owner of a sole proprietorship or single-member LLC is the net income of the business, as calculated on Schedule C of the owner’s personal tax return.
- The taxable income of a partner in a partnership, a member of a multiple-member LLC is based on their of the company’s income.
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How Bench Can Help
Dreaming of a world where self-employment taxes are simple and effortless? Wake upâwe can help make that dream a reality.
When you sign on with Bench, just connect your bank, credit card, and merchant accounts, and your bookkeeper takes care of the rest. All transactions are automatically imported for categorization and review, so you donât miss out on a single deduction.
At year end, your bookkeeping team reaches out for a final review call to ensure your information is accurate before producing CPA-approved reports you can use for DIY tax filing or send on to a tax professional. Or, if you want a completely hands off experience, we can even file for you. Learn more about Benchâs small business accounting and tax filing services.
What Are The Typical Withholdings And Basic Tax Rates
Typically, an employer contributes 6.2 percent of your income into Social Security and 1.45 percent into Medicare. Through your withholdings, you pay an additional 6.2 percent of Social Security tax plus another 1.45 percent of your income for Medicare. Generally, your employer will deduct these amounts from your paycheck and forward them to the government along with its own contribution.
When youre self-employed, however, the task of payingas well as paying the full amount of the taxesshifts entirely onto your shoulders. Currently, that means you have to pay 12.4 percent for Social Security and 2.9 percent for Medicaid. If you earn more than $200,000, for taxpayers filing as single, or $250,000, for married taxpayers filing jointly, youll have to pay an extra 0.9 percent for Medicare. In general, none of these taxes are considered deductible from your overall business overhead. This is the self-employment tax, and it does not take into account federal or state income taxes.
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How To Save For Your Social Security Tax Payments
Now you know youre likely on the hook for paying 12.4% of your net earnings from self-employment in Social Security taxes. Youre responsible for another 2.9% of your net earnings from self-employment to pay Medicare taxes, too. Its a good idea to start setting money aside to pay for those taxes.
is a good place to put your money. Theyre an award-winning online bank for small businesses and self-employed people. They make it easy to run your business by connecting with several services you may use including Shopify, Stripe, Quickbooks, Slack, Xero, Zapier, and more.
Do I Pay Social Security If I Am Self
Yes, you pay Social Security if you are self-employed. Those new to working for themselves need to know that your employer paid half of your social security contributions and you paid the other half. Now that you are self-employed, you are also your employer, and now you are responsible for making the entire Social Security contribution amount yourself.
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Should I File Estimated Taxes
If you have worked as an employee, you know that what you get in your paycheck is usually less than what you really made. Why? Because your employer withheld money for Social Security, Medicare and income tax and sent that money to the government.
When you are self-employed, the entire burden for paying employment taxes and prepaying estimated income tax liability is left to you. The government wants you to make payments of your estimated taxes throughout the year in quarterly installments. If you don’t, you may be subject to underpayment penalties.
- For more information on estimated taxes, see this IRS article on Estimated Taxes.
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Options To Bolster Your Retirement Funding
Self-employed people that want a more comfortable retirement can use the following services to help put money away for their future.
- Betterment is a robo-advisor that helps you invest for your goals, including retirement. Their robo-advisor service helps you lower your tax liability by using smart tax strategies. They even keep costs low with a relatively low 0.25% annual management fee. If you opt for their premium service, that fee increases to 0.40%.
- Wealthfront is another robo-advisor that can help you save for retirement. Wealthfront focuses on minimizing fees by only charging a 0.25% annual advisory fee. Like Betterment, they take advantage of tax-lowering strategies to help you keep more of your money. Wealthfront helps you build a custom portfolio based on your goals and your personal situation. This can be helpful as a self-employed person that may have different needs than a traditional employee.
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Who Has To Pay Self
All self-employed people, like freelancers, independent contractors, and small business owners are required to pay self-employment taxes.
The requirement to pay self-employment tax also extends to W-2 employees who work side hustles. If you drive for Uber only on the weekends or sell the occasional piece of jewelry on Etsy, youâre liable for the full 15.3% â even if FICA taxes are paid through your employer also.
Occasionally taxpayers who work multiple jobs will end up paying more Social Security tax than theyâre liable for. In these instances, the IRS will refund the overpaid tax when you file your 1040 tax return.
How Much Is Kentucky Income Tax For Self
If youre self-employed in Kentucky, youll owe KY income tax and may have other income tax obligations as well.
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Lo: Calculate Fica Taxes For Employees And Seca For The Self
Calculate FICA taxes for employees and SECA for the self-employed.
Richard, your employee, earns $220,000 from you during 2015. He is married, but his wife does not have any earned income. You must start withholding the additional 0. 9 percent Medicare tax when Richards earnings exceed $200,000. Richard will be over-withheld because the couples combined income is beneath the married, filing jointly threshold of $250,000.
- Learning Objectives
- Self Employed Contributions Act Taxes
Unlike the other FICA taxes, the 0. 9 percent Medicare surtax is imposed on the employee portion only. There is no employer match for the Medicare surtax . You withhold this 0. 9 percent tax from employee wages and you do not pay an employers portion. Also, unlike the other FICA taxes, you withhold the 0. 9 percent Medicare surtax only to the extent that wages paid to an employee exceed $200,000 in a calendar year. You begin withholding the surtax in the pay period in which you pay wages in excess of this $200,000 floor to an employee and you continue to withhold it each pay period until the end of the calendar year.
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Social Security Credits For Self
The Social Security Administration adheres to a credit system to determine benefit eligibility. The credit requirements differ depending on the type of benefit being sought. However, the same credit system applies to self-employed and traditionally employed workers.
There is a set yearly amount of earnings needed for Social Security credits, and the amount increases annually with average earnings levels. For tax year 2022, $1,510 of earnings will get you one credit, up to a maximum of four credits per year. For tax year 2023, the amount of earnings needed for one work credit is $1,640.
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What Individuals Should Do If They Are Unable To Pay In Full By The Installment Due Date
Individuals who are unable to pay the full deferred tax amount should pay whatever they are able to pay by the installment due dates to limit penalty and interest charges.
If the installment amount is not paid in full, IRS will send the taxpayer a balance due notice. Taxpayers should follow instructions on the notice to make a payment or apply for a payment plan. They can also visit the Paying Your Taxes page on IRS.gov for additional information about ways they can pay, what to do when they can’t pay, and viewing their tax account.
How The Social Security Tax Works
The Social Security tax is applied to income earned by employees and self-employed taxpayers. Employers usually withhold this tax from employees paychecks and forward it to the government. The funds collected from employees for Social Security are not put into a trust for the individual employee currently paying into the fund, but rather are used to pay existing older people in a “pay-as-you-go” system.
Social Security tax is also collected to support individuals who are entitled to survivorship benefitsbenefits paid to a surviving spouse upon the death of a spouse or to a dependent child upon the death of a parent.
As of 2022, the Social Security tax rate is 12.4%. Half of the tax, or 6.2%, is paid by the employer, and the employee is responsible for paying the other half. The Social Security tax rate is assessed on all types of income earned by an employee, including salaries, wages, and bonuses.
However, there is an income limit to which the tax rate is applied. For 2022, the Social Security tax is taken from income up to an annual limit of $147,000 any amount earned above that is not subject to Social Security tax. The limit for 2023 is $160,200.
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Does Kentucky Have A Tax On Corporations And Llcs
Kentucky has two business taxes.
First, there is a 5% corporate income tax on a corporations net profit. Similarly to the personal income tax, it is a flat tax with no tax brackets.
Second, there is a Limited Liability Entity Tax. This tax will usually be a flat $175 per year unless your business has more than $3 million in gross receipts.
The Limited Liability Entity Tax applies to C-corporations, S-corporations, LLCs, and other business types with limited liability protection under Kentucky law. It does not matter if the business is a pass-through entity.
Refund Of Taxes Withheld In Error
If social security or Medicare taxes were withheld in error from pay that is not subject to these taxes, contact the employer who withheld the taxes for a refund.
If you are unable to get a full refund of the amount from your employer, file a claim for refund with the Internal Revenue Service on Form 843, Claim for Refund and Request for Abatement. Attach the following items to Form 843:
- A copy of your Form W-2 to prove the amount of social security and Medicare taxes withheld,
- A copy of the page from your passport showing the visa stamp,
- If applicable INS Form I-538, Certification by Designated School Official, and
- A statement from your employer indicating the amount of the reimbursement your employer provided and the amount of the credit or refund your employer claimed or that you authorized your employer to claim. If you cannot obtain this statement from your employer, you must provide this information on your own statement and explain why you are not attaching a statement from your employer.
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If You Have A Second Job As An Independent Contractor You’ll Have To Pay Self
If you moonlight as an independent contractor, you’ll have to pay self-employment taxes on the income you receive.
Carnell Specks found out about this rule the hard way. Specks, a Houston police officer, moonlighted by providing security services to various private businesses in the Houston area. He earned about $44,000 doing this work one year. He listed this “other income” on his tax return for the year and paid no self-employment tax on it.
Unfortunately for Specks, the companies he worked for treated him as an independent contractor and reported all the money they paid him to the IRS on Form 1099-MISC–the form used to report payments to independent contractors. Since these firms regarded Specks as an independent contractor, they did not withhold or pay any Social Security or Medicare taxes for Specks. The IRS computers whirred away and quickly discovered that Specks had self-employment income , but had paid no self-employment taxes on his tax return. The result: He got audited.
Here’s a simple rule: If you work as an independent contractor, it’s up to you to pay income and self-employment taxes on the payments you receive. The firms that hire you need not, and will not, do so.
You’ll know if you’re being treated as an independent contractor instead of an employee if you are not asked to complete an IRS Form W-4, Employee’s Withholding Allowance Certificate when you’re hired.
How To Pay Self
You must have a Social Security number or an Individual Taxpayer Identification Number to pay the tax.
Most self-employed individuals pay the tax by filing estimated taxes quarterly. Estimated taxes include liabilities like self-employment and income taxes.
You have a few options for paying estimated tax. You can pay online, by phone, or by check or money order using the estimated tax payment voucher.
Is there a specific self-employment tax form you can use? Use Form 1040-ES, Estimated Tax for Individuals, to help you determine your estimated tax liability, submit payments by check or money order, and view more payment information.
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How Is Seca Tax Calculated For Income Tax Purposes
The amount of SECA tax is calculated and included in the owner’s personal tax return in several steps:
Step 1: The business owner’s taxable income is calculated, depending on the type of business owned, as described above.
Step 2: This income is used to calculate self-employment tax by using Schedule SE.
Step 3: Half of the calculated amount of the self-employment tax is deducted from the individual’s taxable income on page 1 of the 1040 form.
Step 4: The rest of the self-employment tax is included in the calculation of taxes owed by the individual.
What You Need Know If Youre Self Employed:
- Instead of withholding Social Security taxes from each paycheckyou pay all the Social Security taxes on your earnings when you file your annual federal income tax return.
- Self-employed individuals earn Social Security work credits the same way employees do and qualify for benefits based on their work credits and earnings.
- How much you pay in Social Security taxes is based on net income.
- Deductions that you claim can make your taxable income substantially lower, but it can also potentially decrease your Social Security benefits later.
- Your Social Security benefit payment is calculated based on your 35 highest-earning years.
- If you earned $400 or less, Social Security taxes will be waived.
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