that 15.3% is likely to be a stunner.
by barry j. friedman, cpa
industrynewsletters
your clients are self-employed if they’re in business for themselves – including a part-time business. that means they’re also their own tax manager!
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your clients can be self-employed as a sole proprietor/an independent contractor, or a member of a partnership or of a limited liability company. as such, they need to file an annual income tax return and pay estimated taxes throughout the year on their income.
also, they may have to remit self-employment (se) tax payments as well with their estimated income tax payments. the se tax is a social security and medicare tax – being self-employed, they have to pay both the employer and employee portions.
the self-employment tax is 15.3 percent of their net earnings. as an employee, you and your employer split the burden, each paying half. this is why your client’s first reaction to the se tax may be dismay – but there are deductions from running a business to take into account.
to offset their annual income and self-employment tax liability, they may be required to make quarterly estimated tax payments to cover the anticipated self-employment and income tax liability. typically, the quarterly payments are due april 15, july 15, sept. 15 and jan. 15. quarterly estimated tax payments can be made using form 1040-es, estimated tax for individuals. the taxpayer may elect to pay electronically through the electronic federal tax payment system. if this is their first year being self-employed, they will need to estimate the amount of income they expect to earn for the year.
if their net earnings from self-employment exceed $400 or more, they will be required to file a personal income tax return with a calculation for their self-employment taxes on schedule se. net earnings are generally calculated by starting with gross income from the business and subtracting deductions and depreciation allowances.
generally, they’ll have to file a schedule c or schedule c-ez to report their income or loss from a business they operated or a profession they practiced as a sole proprietor. if their expenses add up to $5,000 or less, you can file schedule c-ez instead of schedule c.
they may operate as a married couples business – a qualified joint venture – and though they file a joint return, they can elect not to be treated as a partnership for federal tax purposes. they each can calculate their self-employment taxes separately, as well as account for their respective share on schedule c. there may or may not be advantages to doing this, so they’ll consult with you before making a decision.
for more help, guide them to the irs’s “small business taxes: the virtual workshop,” an online learning tool with nine interactive lessons designed to help them understand their tax rights and responsibilities. the irs video portal contains video and audio presentations on topics of interest.