Self-Employment Tax

If you are a partner in a Partnership or and individual that files Schedule C, you need to be aware of Self-Employment Tax. The IRS charges the tax to fund Social Security and Medicare, and it is similar to withholdings shown on an employee W-2. The IRS wants to prevent a partner or Schedule C filer from getting around paying their share of Social Security and Medicare taxes since these two types of taxpayers do not receive a W-2 related to their Self-Employment Income.

The tax rate is 15.3% on 92.5% of the first $132,900 of income. The calculation gets complicated after that. Here is a Schedule C example:

Sales = $400,000

Expenses = $300,000

Net Income = $100,000 = (Sales – Expenses)

Tax base to calculate Self-Employment Tax = $100,000 x 92.5% = $92,350

Self-Employment Tax = $92,350 x 15.3% = $14,130

The party doesn’t end there. Net Income is also added to Form 1040 (Individual Income tax return) as Other Income to arrive at adjusted gross income. What does that mean? It means you still have more tax to pay even after forking out the Self-Employment Tax. Here is a quick example:

Net Income from above = $100,000

Average Federal Tax Rate = 25%

Tax = $25,000 = ($100,000 x 25%)

Total Tax Resulting from Schedule C Activity = $39,130 = ($14,130 + $25,000)

The example above does not factor in the 50% Self Employment Tax deduction, so in actuality, the Total Tax would be less than $39,130 but not much. The point is that a huge chunk of your hard-earned money gets blasted away by the IRS. There is a way around self-employment tax if you are willing to file a separate tax return for your Schedule C business. Contact us for details.

Joe Wright CPA PLLC provides the information in this blog as a general guide. Tax laws are extremely complex, and every taxpayer is unique. Some or all of this information may or may not apply to you. We provide simplified situations to clarify some of the major aspects and highlights of the topic at hand. Some of the language used is casual and may be misconstrued. Please make an appointment with us soon to discuss your particular circumstances.