In a previous post, we discussed how the requirement to make estimated tax payments applies to small businesses. As we mentioned in our July 2 post, self-employed individuals must also make estimated tax payments each quarter.
In today's post, then, let's focus on the applicability of self-employment tax to individuals. There are many such individuals in Texas and throughout the country.
These individuals have various professions. Some are pastors, who are treated as self-employed by the tax code. Others are farmers or self-employed business owners.
The main reason why self-employed individuals are subject to self-employment (SE) tax is that this is how they pay Social Security and Medicare taxes. Many workers have these taxes withheld by their employers. But many other workers are not classified as employees and so are responsible for making their own SE payments.
Even when it is spread out over four quarters, the combination of Social Security and Medicare taxes is considerable. For 2013, a combined rate of 15.3 percent applies on the first $113,700 that is subject to SE. Of this 15.3 percent, 12.4 percent is for Social Security and 2.9 percent is for Medicare.
SE income that exceeds $113,700 is not subject to Social Security tax. But it remains subject to the 2.9 percent Medicare tax. And there is an extra Medicare of 0.9 percent for those who have SE income of more than $200,000, or more than $250,000 for married couples filing jointly.
With such significant amounts of income subject to SE tax, it is especially important to take the full tax deduction allowed for those payments on your income taxes.
Source: Market Watch, "Do you owe the self-employment tax?" Bill Bischoff, August 20, 2013