Self employed taxpayers may wonder why their tax rates seem higher than for individuals who are employed for companies. They may also find themselves perplexed by a self employment tax rate of 12.4% and a government that requests they pay 15.3%. The reason for this is simple. The IRS basically puts Social Security and Medicare taxes together into one self employment tax. The rate for Social Security is currently 12.4%, and Medicare is at 2.9%. Medicare tax is applied to income no matter how much one earns, whereas Social Security has a $106,800 cap. Any income above that is not taxed by Social Security.
In order to report self employment tax, a taxpayer must fill out IRS Schedule SE and submit it along with a 1040 form. Self employed individuals can claim the Earned Income Tax Credit when they file Schedule C with their 1040. They may also be eligible for a self employment health insurance tax deduction. This allows these taxpayers to deduct the cost of their health insurance. There is also an above-the-line deduction that can be taken when figuring adjusted gross income. One can deduct one half of one’s self employment tax from their income tax on Line 27 of IRS Form 1040.
Who has to pay self employment taxes? Anyone that is self employed with net earnings over $400 must pay this employment tax. Church employees begin paying when their incomes are greater than $108.28. Independent contractors and sole proprietors can use Schedules C or C-EZ to calculate their net earnings to see if they qualify for paying the self employment tax. Family caregivers who provide services to the elderly or disabled individuals are usually considered employees of those individuals. Special rules exist for these workers. For questions on these and other rules and deductions, it is recommended to speak with a qualified tax professional.