The self-employment tax is separate from income tax. A self-employed person pays income tax on his or her business earnings according to the IRS Tax Table for personal income. The self-employment tax covers the Social Security and Medicare contributions that aren't withheld from the taxpayer's earnings throughout the year.
A taxpayer is considered self-employed if he or she owns a business as a sole proprietor or independent contractor, or is the member of a partnership that runs a business [source: IRS]. You must pay self-employment taxes if you make more than $400 a year from non-church employment.
When we talked about payroll taxes, we mentioned that the employer is responsible for matching the employee's contributions to Social Security and Medicare. Since a self-employed person is both employee and employer, he or she must pay the full FICA taxes -- 15.3 percent of total income -- with no assistance. If a self-employed person earns more than $106,800, she uses a different calculation: 2.9 percent plus $13,243.20.
To pay self-employment tax, you either need a Social Security number or an individual taxpayer identification number (ITIN) for non-resident aliens. If you expect to owe more than $1,000 in self-employment tax, you're required to pay estimated taxes quarterly. You are penalized if you don't pay estimated taxes and wait to do it all at the end of the year. Self-employed workers can pay estimated taxes either by check or through the Electronic Federal Tax Payment System. If it's easier to pay the tax when you receive each check, you can pay monthly or even weekly, as long as the total adds up at the end of the quarter.
We hope this has been a helpful introduction to federal taxes. For lots more information and helpful tax-related links, head over to the next page.
Related HowStuffWorks Articles
- 1040.com. "Tax Credit Overview"http://www.1040.com/site/FederalTaxes/TaxCredits/tabid/80/Default.aspx
- Business.gov. "Employment Taxes"http://www.business.gov/finance/taxes/employment.html
- Business Owner's Toolkit. "Small Business Guide: Federal Tax Deposits"http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P07_1307
- Internal Revenue Service. "Publication 15: Employer's Tax Guide"http://www.irs.gov/publications/p15/ar02.html#en_US_publink1000202280
- Internal Revenue Service. "Publication 17: Your Federal Income Tax for Individuals"http://www.irs.gov/pub/irs-pdf/p17.pdf
- Internal Revenue Service. "Self-Employment Tax"http://www.irs.gov/businesses/small/article/0,,id=98846,00.html?cm_sp=ExternalLink-_-Federal-_-Treasury
- Internal Revenue Service. "Taxes in US History"http://www.irs.gov/app/understandingTaxes/student/whys_thm02_les05.jsp
- Internal Revenue Service. "Your Role as a Taxpayer"http://www.irs.gov/app/understandingTaxes/student/whys_thm01_les03.jsp#quickCheck
- Tax History Museum. "1901-1932: The Income Tax Arrives"http://www.taxhistory.org/www/website.nsf/Web/THM1901?OpenDocument
- TurboTax. "Form W-4 and Your Take-Home Pay"http://turbotax.intuit.com/tax-tools/tax-tips/career/5474.html
- U.S. Department of the Treasury. "Economics of Taxation."http://www.ustreas.gov/education/fact-sheets/taxes/economics.shtml
- U.S. Department of the Treasury. "History of the US Tax System"http://www.ustreas.gov/education/fact-sheets/taxes/ustax.shtml
- U.S. Department of the Treasury. "Joint Statement of Tim Geithner, Secretary of the Treasury, and Peter Orszag, Director of the Office of Management and Budget, on Budget Results for Fiscal Year 2009." October 16, 2009http://www.treas.gov/press/releases/tg322.htm