We’re getting to the not so fun part of our series. First, we covered the 1040 which is the basic tax document for individual. Then we talked about the Schedule C, which is where you as a business owner get the chance to get some large tax benefits. Now, we’re going over the Schedule SE. SE stands for self-employment and this is where you fill out your info to calculate how much you owe in self-employment taxes. Boo!
Overview
We’ve talked about self-employment taxes before but let’s go through a quick refresher.
The self-employment tax is the government’s way of making sure you’re still paying for Social Security and Medicare. You may have noticed that on your paychecks from an employer you had a line for FICA deductions. That’s your combined Social Security (6.2%) and Medicare (1.45%) taxes. You the employee paid a grand total of 7.65% of your income towards those programs. Well guess what? Your employer also paid those taxes.
This is the key thing that most people don’t understand about going out on their own. You’re now responsible for both the employee and employer part of your taxes. That extra 7.65% is your self-employment tax. You pay it in addition to your income taxes so earning income from self-employment can be a little more expensive than earnings from work. You shouldn’t avoid going out on your own just because of this tax. However, you should be aware of it and plan for it.
Your self-employment tax is deductible as a business expense so you do at least get a bit of a break from it. Also, only $118,500 for 2016 is subject to 12.4% of the tax. If you earn more than that you pay full self-employment taxes on the first $118,500 and then only the 2.9% for Medicare on the rest of your earnings. Yay tax breaks for the rich?
Do I Have To Use Long or Short Form?
Follow the flowchart, the answer is maybe. In fact, if you earned less than $118,500 from your stream it’s likely you can use the short form. Either way, it’s not like the long form is that much longer so I don’t think you should really be worrying a ton about that piece.
Short Form
This is actually a really simple form if you’ve already done your Schedule C. You can ignore line 1 unless you’ve earned some farm income (not Stardew Valley, an actual farm). You enter your net profit or loss from your Schedule C on line 2, also add that total to line 3, and multiply line 3 by 92.35%. The reason you do that is because you’re taking the deduction you get for the employer portion of your self-employment taxes (7.65%) into account right off the bat. That just makes life easier.
Once you’ve gotten that number you just multiply it by 15.3% (again, the total you owe as employer and employee) and that’s how much you’re paying. Line 6 is where you enter that business deduction I mentioned earlier.
Long Form
The long for extends the short form (shocking!) for the main purpose of making sure that you aren’t double paying Social Security taxes as a high earner. Basically, if you’re earning more than $118,500 you’re off the hook for part of the tax as mentioned above. Lines 1-7 are basically the same items as the short form. Line 8 is designed to see if you paid any Social Security tax on other income. If you had a job but then your stream took off you still want to make sure that you’re not double paying!
The rest of the steps are pretty clearly laid out. Don’t forget, even though you don’t owe the 12.4% on income after $118,500 you are on the hook for the 2.9%.
Optional Methods to Figure Net Earnings
Pretty much you can ignore this. If you earned less than $5,457 from self-employment and it was less than 72.189% (don’t ask me where they got these numbers) you can estimate your net earnings. Basically, don’t mess with this. Take the time to be diligent and do a Schedule C. You’ll thank me in the future and it will really help you have a better idea of how your business is operating.
Conclusion
This is a much abbreviated topic than I normally write about but it’s one that you CANNOT forget as a self-employed business owner. You need to know when you’re making decisions about your business that you’ll be subject to more taxes than you expect. Take the time to really do a good job on your Schedule C and your Schedule SE will be a breeze. If you have any questions about this article or you have other questions you want us to answer, leave a comment below and we’ll get to it.
