So who exactly is subject to the IRS self employment tax? Sole proprietors, partners in a small business and independent contractors are the most common examples of people subject to the self employment tax. But just because you make a couple of dollars selling some stuff on an auction website doesn't mean you'll have to pay taxes on it. You need to have earned $400.00 or more during the tax year before you have to pay taxes on the money.
To help explain what the self employment tax is you need to understand what taxes are paid on your behalf when you work for someone else. The taxes that would normally be taken out of your check by your employer include both the federal withholding tax and FICA. The tax we're concerned with here is the FICA tax. Normally this tax is 7.65% of your gross income. The tax is actually two separate taxes. One is your Social Security tax with a tax rate of 6.2%. The other goes to Medicare and the tax rate for it is 1.45%. Combined you have your 7.65% tax rate.
Now the federal withholding and FICA taxes are normally withheld by your employer and sent to the IRS. But the actual rate paid to the IRS for the FICA tax is not 7.65%. That is just the portion that is withheld from your paycheck. The actual FICA rate that is paid is 15.3%. The 7.65% you pay on your gross wages has to be matched by your employer and is then applied to your account. So if you had $100.00 withheld for the FICA tax by your employer then they have to match that money with an additional $100.00. If you are the employer this can eventually become a very large amount of money that you will be responsible for paying.
So if you are considered self employed the self employment tax you are paying is the matching portion of your FICA taxes. Since the taxes must be paid and you are considered your own employer you are responsible for paying the tax yourself. The government will always want its money regardless of where they get it.
If you are an entrepreneur and own a small business then there is no real way of getting around this tax. Even if you file W-2's for yourself and your employees you will still pay this tax on yourself. It will just change from being a self employment tax back to a matching FICA tax. Either way it will come out of your pocket. It's just one small price you will have to pay to be your own boss.
Cash Miller is an experienced entrepreneur and speaker who has spent over a decade as a small business owner. His years of experience in small business cover a variety of topics. If you are looking for more small business help please check out www.smallbusinessdelivered.com
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