You can pay FICA (Federal Insurance Contributions Act) taxes as a self-employed person.
Everyone pays both FICA taxes and income taxes. If you’re an employee, your company manages the FICA tax payments for you.
The process is more complicated for the self-employed business owner.
What are FICA taxes?
Federal Insurance Contributions Act taxes are collected to fund Social Security taxes and Medicare tax.
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For 2019, employers and workers each pay a 7.65% FICA tax rate on a worker’s gross wages. The worker’s taxes are withheld from gross pay, and the employer sends the payments to the federal government.
Medicare taxes are assessed on every dollar of earnings. Also, additional Medicare tax can come into play based on a self-employed, or individual’s, wages or income, as well as their filing status. Seeking an expert to sift through the regulations surrounding medicare tax is very important.
On the other hand, Social Security taxes have a wage base limit, or Social Security wage. For 2019, workers pay Social Security tax on the first $132,900 in earnings, with the OASDI tax rate set by law at 6.2% for employees and employers, each. Income level and filing status are the key factors in deciding how Social Security is taxed and what Social Security benefits will look like.
If you’re self-employed, payroll taxes are collected using a different process.
FICA tax for the self-employed
The self-employed don’t have an employer to collect and pay FICA taxes. Instead, you must pay both the employer and worker amounts (15.3% total), and deduct one-half of the self-employment taxes on your personal tax return.
To explain the steps involved, let’s assume that Mary works as a freelance graphic designer.
Mary has three clients, and each customer sends her a 1099 form for the year for IRS purposes. The form reports the gross earnings paid to Mary, and 1099 forms do not include withholdings for FICA tax.
A side note: Companies are required to send a 1099 form for each worker who is paid $600 or more during the year. If you earn less than $600 from a client and don’t receive the form, you still include the income on your tax return.
Self-employed workers use Schedule C to report income and expenses on the personal tax return (Form 1040).
Part 1 of the form lists your income, including earnings reported on 1099 forms. Expenses are listed in Part 2. The bottom of the schedule lists Mary’s net income (profit) from self-employment.
The net income on Schedule C is added to other sources of income on the personal return.
Self-employment tax is calculated on a separate form.
Mary uses Schedule SE to calculate the self-employment tax.
The form provides a flowchart to determine what she needs to complete the short form or long form. Most workers complete the short form using these steps:
- Line 3 totals Mary’s income, and that total is multiplied by 92.35% on line 4.
- If your income is $128,400 or less (for tax year 2018), you multiply the total from line 4 by 15.3%. That amount is your self-employment tax.
- On line 6, Mary deducts one-half of the self-employment tax.
Mary’s net income, self-employment tax and the tax deduction are each reported on her personal tax return.
Impact on Form 1040
Assume that Mary’s net income is $60,000, which she reports on Schedule C.
On Schedule SE, Mary multiplies $60,000 by 92.35%, and that result by 15.3%. Her self-employment tax is $8,478. The self-employment tax deduction is one-half of the tax, or $4,239.
All three amounts are reported on Mary’s personal tax return.
Things are more complicated if you have other sources of income.
Other income sources
Any additional income increases the tax liability on your personal return.
If Mary files jointly with her spouse, the spouse’s wages or self-employed income is included. Mary may have dividend and income earnings from investments, or rental income from a property.
There may be a lot of moving pieces, and managing your taxes can be frustrating, so you must find solutions so that you comply with the IRS.
This article was produced by the Quickbooks Resource Center and syndicated by MediaFeed.org.
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