If you’ve ever worked for someone else, you’re probably familiar with FICA. It’s a tax that funds the Social Security and Medicare programs and is automatically withdrawn from your paycheck. If you’re self-employed, however, things are a little different.
When you pay FICA, which is about 15% of your earnings, you’re actually only paying half of what the government requires. Your employer matches your rate to cover the rest. Self-employed pay the same tax only it’s called SECA — you are technically your own employer so you have to carry the whole burden. That means you’re paying the 6.2% for Social Security and 1.45% for Medicare twice! Yes, you’re paying double what is required of self-employed professionals!
This, however, does not need to be the case. The government actually wants to help you pay for half of the SECA tax, it just doesn’t exactly come right out and say so. Make sure you’re properly filing for self-employment deductions so you’re not throwing away money.
The IRS says: Generally, you are considered to be self-employed if any of the following apply to you:
- Carry on a trade or business as a sole proprietor or an independent contractor
- Are a member of a partnership that carries on a trade or business
- Are otherwise in business for yourself (including a part-time business)
Before determining if you are subject to self-employment and income taxes, figure out your business’s net profit or net loss. The IRS tells us that if your net earnings from self-employment are $400 or more, you have to file an income tax return. Be a smart entrepreneur and know your tax obligations and what you can avoid paying.