by Steven Aldrich, CEO of Outright
Self-employment tax is a mystery to most new small business owners. In fact, when you first hang out your shingle, it can be confounding to find out that there is even such thing as “self-employment tax”. But, in a nutshell, self-employment tax makes up for the fact that you are not contributing to social security and Medicare through an employer.
Here are a few more essentials of self-employment tax for the new small business owner:
1. Self-employment tax is calculated on the “net earnings” from self-employment, that means your revenue less business expenses.
2. Self-employment tax is computed and paid as part of your annual individual tax return. Generally you will use Schedule SE with your individual form 1040 to figure your self-employment taxes.
3. You can deduct ½ of your self employment tax when you calculate your adjusted gross income for tax purposes.
4. You can deduct your self-employed health insurance costs from business profits when calculating your self-employment tax.
5. The self-employment tax rate is a combination of 12.4% for social security benefit taxes and 2.9% for Medicare taxes for a combined rate of 15.3%. Just for 2011, the self-employment tax rate has been dropped to 13.3% for the combined rate.
Keep these points in mind and you’ll have no trouble with Uncle Sam come April 15.
(Editor’s note: Note that these tax tips apply to the United States. For other countries, please check your taxation laws.)
Steven Aldrich, entrepreneur, small business advocate, and Silicon Valley veteran, joined Outright as the CEO in June of 2011. Aldrich understands and empathizes with Outright’s target customer base after starting a web company during grad school that was acquired by Intuit and from his experience as CEO of Posit Science. His main focus as the CEO of Outright is to drive the company’s continued growth.