Self-employed workers have tax compliance challenges that other taxpayers do not.
The underlying reason for this fairly simple: workers who are considered self-employed for tax purposes have to pay their Social Security and Medicare taxes. You don’t have an employer withholding and paying it for you, but instead have to do it yourself, typically through quarterly estimated tax payments.
There are, however, many complexities involved with self-employment taxes. In this post, we will take note of three useful things to know.
There is a threshold for net earnings before self-employment tax applies.
The earnings threshold is generally $400. For church employees it is $108.28.
Keep in mind as well that there are caps on the amount of income that is subject to Social Security tax. That amount is currently $118,500.
Some workers are considered self-employed even if they get a W-2.
Self-employed people are generally those who run their own business or work as independent contractors. But there are some workers who receive W-2s yet are still considered self-employed for purposes of Social Security and Medicare taxes.
Ministers and certain other religious workers are a common example of this. IRS Publication 517 discusses the various scenarios in detail.
Self-employment tax considerations can affect choice of business structure.
A member of a business partnership is considered self-employed. So is the owner of a limited liability company (LLC), who must pay self-employment taxes on profits.
But as we explained in a post on choice of entity a couple of years ago, owners of S corporations do not face this type of taxation.