FinançasJurídico14 março, 2019|Atualizadofevereiro 03, 2021

Is your business income subject to self-employment tax?

Self-employment taxes are payroll taxes that small business owners are subject to and that carry varying payment and filing responsibilities depending on the form of the business.

If you're self-employed and running your own business without any employees, you may think you have no need to concern yourself with payroll taxes. However, even if you don't hire anyone else to help you run your business, you're always going to have at least one "employee," and that would be you! You're probably wondering what that means with respect to the kind of payroll tax obligations you will have for yourself.

The form you run your business in shapes your payroll tax responsibilities if the only employee in your business is you. If you happen to run your business through a corporation, you're likely to have all the same payroll obligations you would have if you actually hired another employee. This is because corporations are treated as distinct legal entities from their founders and shareholders. In other words, a corporation that you form and of which you are the sole shareholder can nonetheless be your employer for payroll tax purposes. So whether your corporation is a C corporation or an S corporation, you'll pay payroll taxes on your salary.

Okay, but what if you don't incorporate? For starters, you aren't considered your own common-law employee. Therefore, you won't have any of the general payroll tax obligations that come with hiring employees. However, what you will have are some very close substitutes.

First, you should be aware that although you won't have to withhold income taxes from the income you draw from your business, you may have to make quarterly estimated tax payments.

Furthermore, if you earn at least $400 a year from your business, you'll have to pay self-employment (SECA) taxes. In essence, self-employment taxes are like the employer-employee-based FICA taxes, but SECA taxes are imposed on folks like you who are in business for themselves. For sole proprietorships, partnerships, and limited liability companies, the self-employment taxes are imposed on your net self-employment income, which basically is just your business income reduced by your business deductions.

Like FICA taxes, self-employment taxes consist of a Social Security tax and two Medicare taxes (a “regular” Medicare tax and, as discussed below, a high-income Medicare surtax). The initial rate is 15.3 percent total, with a Social Security rate of 12.4 percent and a "regular" Medicare rate of 2.9 percent. In other words, you have the same initial rate you would get by adding the employer and employee portions of these FICA taxes together. However, for self-employment tax purposes, you get a deduction to essentially recoup the employer’s portion.

The amount of income subject to the 12.4 percent Social Security rate ($113,700 for 2013; $11,700 for 2014) may be adjusted each year for inflation. However, there is no cap on the amount subject to the 2.9 percent regular Medicare tax.

For tax years beginning after 2012, a third tax, the 0.9 percent Medicare surtax, applies to self-employment income exceeding a threshold amount. (The Medicare surtax also applies to FICA wages and Railroad Retirement Tax Act (RRTA) compensation). This tax is borne solely by the wage-earner--there is not corresponding employer portion. This is why there is no employer-equivalent deduction for self-employment tax purposes. The threshold amount is based on filing status ($250,000 for a joint return, $125,000 for separate, and $200,000 in any other case) and is coordinated with FICA wages but not the RRTA.

If your income is high enough to be subject to the surtax, consider increasing the amount of your estimated tax payments, in order to avoid a penalty come tax time. Your accountant or advisor should be able to help you decide how much to pay.

One technique to lower taxable earnings and hopefully reduce exposure to the Medicare surtax is to divert income into a qualified retirement plan.

Finally, on what type of form do report the tax? It's reported on your annual federal income tax return, on Schedule SE.

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