As the term suggests, self-employment tax is paid by small business owners and individuals who are self-employed. This tax is similar to the Federal Insurance Contribution Act (FICA) tax. This tax contribution is used to fund social security and Medicare. All individuals who otherwise don’t pay withholding tax are liable to pay self-employment.
Here are all the other details that you need to know about self-employment tax in Anaheim, CA.
Self Employment Tax in Anaheim, CA – The Details
Self-employment tax is collected from all individuals who are categorized as ‘self-employed.’
The list of self-employed individuals may include sole proprietors, independent contractors and freelancers. The IRS may identify a member of a business partnership as a self-employed individual as well.
Self-employment tax is considered to be the essential contribution for receiving social security benefits on retirement.
Self-employment tax is reported on Form 1040 Schedule SE to the IRS.
Normally, the contribution rate is 6.2% each for both employers and employees. In case of self-employment, the rate is doubled since an individual acts in both roles. Hence, you need to pay 12.4% of your net income towards self-employment contributions for social security.
The good news is that there is a maximum limit of an individual’s income for self-employment tax purposes.
In 2022, the amount was revised to $147,000 from $142,800. This means that the maximum tax one has to pay annually is $18,228. Income exceeding $147,000 is exempted from self-employment taxation in the United States.
However, the above figures are related to the social security benefits. As mentioned earlier, Medicare is the second component of self-employment tax, for which additional tax is to be paid.
The rate for Medicare is 1.45% each for employers and employees. Hence, self-employed individuals are expected to pay a total of 2.9% additional tax as a Medicare contribution.
So, in total, self-employment tax rate comes at 15.3% (12.4% + 2.9%).
Another important thing to remember is that there is no maximum cap for Medicare contribution. Self-employed individuals do not have to pay withholding taxes. Therefore, the IRS requires these individuals to pay estimated tax liability on a quarterly basis. This, of course, is in addition to state and federal income tax obligations.
On March 27, 2020, then President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This Act deferred employer’s portion of social security contribution for self-employment taxes. This was for the period between March 27, 2020 and Dec 31, 2020. The outstanding tax was to be paid in the next two years in two installments.
While this was about the numbers. There are other things to consider as well. The fact of the matter is that while self-employment has its own perks, keeping up with taxes can be tricky.
Since tax is not automatically deducted, it becomes difficult to calculate and pay when the time comes. Hence, it is recommended to always set aside a portion of your income on a periodic basis, such as monthly. Moreover, don’t wait for the last moment to perform all the calculations.
Keep your paperwork and numbers ready well before the deadline.
Unless you are fine with the IRS coming to your door, you need to be proactive in your approach. Depending upon your income, you may want to hire a tax professional or a firm to ensure adequate professional help.
At the same time, it is important to keep yourself updated with the latest happenings related to self-employment taxes. For example, any changes in tax rates or income thresholds or income sources exempted from self-employment taxation.
At present, any job where you earn less than $400 a year is fully exempted from self-employment taxation.
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Zee Maq is a content writer who specializes in writing business and finance content. She has nine years of experience and loves to provide problem-solving content to help people tackle challenges in their everyday lives.