Self-employment taxes are notoriously complicated. Deductions, quarterly payments, and other considerations confuse and frustrate millions of independent contractors and sole proprietors. Not sure where to start? Use this simple guide as a blueprint.
- Track all earnings and expenses.
Income eligible for self-employment taxes includes anything earned as an independent contractor, through babysitting, blogging, or other money-making endeavors pursued outside of traditional employment. Tracking is easy for independent contractors, who fill out 1099 forms for all companies providing contracting income.
- Determine whether business expenditures can be deducted.
Business deductions can significantly reduce your tax burden, but the IRS has strict guidelines regarding which types of expenditures are eligible for deduction. Depending on your situation, you may be able to deduct retirement account contributions, vehicle use, mortgage interest, or business item depreciation. Various online resources can help you determine which deductions are valid, but if you’re confused, it may be in your best interest to seek help from a trusted tax attorney or advisor.
- Calculate your net income.
Once you’ve determined your full income and your eligibility for various tax deductions, it’s time to calculate your net income. Simply subtract your expenses from your annual revenue, and then multiply the resulting figure by 92.35 percent. This final step will account for the self-employment tax deduction for which you are eligible.
- Multiply your net income by 15.3 percent.
Keep in mind that the Social Security portion of your self-employment tax only applies to the first $118,500 of income. There is, however, no cap on the Medicare tax, which targets 2.9 percent of your net income.
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Calculating self-employment tax can be surprisingly difficult — and you might not be happy with the result. To learn more about this process and how you can reduce your tax burden, call 720-398-6088 today.