Paying taxes is one of the most important obligations involved in running a business. As a small-business owner, you may be responsible for a variety of federal, state, and local taxes, including taxes that are based on the income your business generates. If you are categorized as self-employed by the Internal Revenue Service (IRS), you are typically responsible for paying self-employment taxes on your earnings.
The IRS Defines the Self-Employed
Certain categories of people who run businesses are considered self-employed by the IRS. The self-employed label applies to anyone who runs a business that does not file a business income tax return and pay taxes at the business level. If you operate your business as a sole proprietorship, partnership, or a limited liability company that is taxed as a sole proprietorship or partnership, you are considered self-employed. Also, you are self-employed if you work for someone else as an independent contractor.
If you are employed by someone else and receive a paycheck, your employer withholds Social Security and Medicare taxes from your pay. In addition, your employer pays additional Social Security and Medicare taxes on your behalf. When you're self-employed, you must pay this money, both the employee's and the employer's portion, on your own. Although it's called "self-employment tax," it's your required contribution to Social Security and Medicare, and it counts toward your future benefits.
Income Over a Certain Threshold
The IRS requires you to pay self-employment taxes if you earn $400 or more in net earnings from your self-employment activity in a year. "Net earnings" is the amount you have left over in profit after you deduct your business expenses. The $400 threshold can be reached through full- or part-time work and from more than one self-employed activity.
Social Security Earnings Limit Applies
Taxpayers are obligated to pay Social Security tax only on income up to a certain threshold that is set each year by the IRS. For example, in 2012, the earnings limit was set at $110,100. Any money you make over the limit is not subject to the Social Security portion of self-employment tax. However, you are still responsible for paying the Medicare tax portion on these earnings.
A Tax Lawyer Can Help
The law surrounding payment of taxes by the self-employed is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a tax lawyer.