It’s a great feeling to be your own boss and make money at it. At least, until you discover that you are now responsible for paying self-employment tax and may be required to make estimated tax payments. I have been paying self-employment tax over the last few years; however, I have not made an estimated tax payment to the IRS yet. Instead, I have been increasing the federal and state income taxes withholding from my job to cover the increasing tax burden. In this article, I’ll try to cover some of the basic as it pertains to self-employment tax and estimated tax payment.
Normally when you work for an employer, they will pay half of your Social Security and Medicare tax, and withhold taxes from your paycheck to cover your tax bill. But when you are in business for yourself, you have to pay the entire amount your own. This self-employment tax rate is 15.3%, and it consists of two parts: 12.4% for Social Security and 2.9% for Medicare.
Fortunately, you can deduct half of your self-employment tax (or SE tax) in figuring your adjusted gross income. Wage earners cannot deduct social security and Medicare taxes.
You must pay SE tax and file Schedule SE (Form 1040-ES) if either of the following applies.
The SE tax rules apply no matter how old you are and even if you are already receiving Social Security or Medicare.
You figure SE tax yourself using Schedule SE (Form 1040-ES). For 2009, only the first $106,800 of your combined wages, tips, and net earnings is subject to any combination of the 12.4% social security part of the self-employment tax. That is if your income is less than $106,800, simply multiply the amount by 15.3%. If your income is more than $106,800, then multiply the amount by 2.9% for Medicare, and add $13,243.20 (maximum Social Security tax) to the result.
Our system is a pay-as-you-go tax. This means you must pay the tax as you earn or receive income during the year. There are two ways to pay as you go: withholding and estimated taxes. If you expect to owe tax of $1,000 or more (including self-employment tax) when you file your return, you generally have to make estimated tax payments. To make estimated tax payment:
Normally, you have to pay estimated tax payment before your normal income tax return filing date deadline. However, you can make also choose to make 4 equal payments according to the IRS payment due date schedule. For example, 2009 estimated tax due dates are: April 15, June 15, September 15, and January 15 (2010).
These are just the basics and taxes can get complicated quickly — especially when you throw in state and city taxes into the mix. Despite my research and many hours spent reading about taxes, I am still not fully comfortable with my current tax situation and will most likely hire a tax advisor to help me with my 2009 taxes. After all, do it yourself can only get you so far in this world!