Self Employment Taxes and The Small Business Owner
I often hear about Self Employment Taxes. Most business owners often ask “What are Self Employment taxes?” and “Why are the taxes so much more for a business owner?” Recently I did a webinar – “Small Business Tax and the Small Business Owner”. Click here or the picture to receive your copy of the webinar!
Most people know when operating an business there is a cost. The commonly know term is, “The Cost of Doing Business” however running/owning a business also has benefits. Your business structure will determine the type of business taxes that you will pay and the credits and deductions that your business is eligible to receive.
The last newsletter we talked about Business Structure and 3 Simple Tips to Select a Business Structure. In this article I also discuss how the business structure effects your taxes. Click Here for more information from this article..
Self employment taxes are what we call payroll taxes as an employee and in a corporation. Self employment taxes consist of Medicaid and Social Security taxes. You can not avoid these taxes by having a certain business set up. Your particular business structure will only determine how you calculate and report the taxes.
Example: A non corporation would pay self employment taxes on owners draw. Owners draw is money that is taken directly out of your account to pay yourself. I always recommend paying yourself however there is a system to paying yourself that will make the process easier. We will discuss that later.
How Self Employment Taxes Work… ..
Owner Withdrawal $500.00
Self-Employment Tax 15.3% – $ 76.50
Your Net Payment $423.50
Self-Employment Taxes Equal:
- Federal Tax- Use tax tables. Include income for all sources including a spouses income
- Medicare Tax 2.9% (1.45 x2)
- Social Security Tax 12.4% (6.2 x 2)
- State Tax – vary state to state – calculated using estimated tax calculations
- Federal and State Amounts are based on number of allowances claimed on your W-4.
In the example above, you may have noticed Medicare taxes and Social Security tax rates are doubled. The reason is FICA taxes are actually 15.3% however only 7.65% is deducted from your check as an employee and the employer (your boss) pays the other 7.65%. When you are self employed you pay the full 15.3% . Paying the full 15.3% is known as self employment taxes.
The benefit of being incorporated or operating as a corporation is the corporation will cover 7.65% and you treat your self as an employee. You issue yourself a check and your taxes are deducted and matched and paid by your corporation. Your owner’s pay and taxes are also consider a tax deductible expense to your business.
A non corporation can not deduct owners pay and taxes. The owner of a non corporation would roll over the a higher net income from the business into personal taxes. A corporation stands on it’s own and would pay business taxes on the net income.
Self Employment taxes are submitted on a 941 form. All business owners would submit the 941 form. The difference is a corporation will calculate the taxes due on a different amount. The non-corporation would first calculate estimated taxes and then submit the 941. The non-corporation would need to calculate taxes using all income sources including a spouses income or and income outside of the business.
The taxes that may apply to you depending upon your business entity. That’s why consulting with an accountant will help you determine the business taxes that apply.
Common tax types are listed below. However how the tax is calculated is based your each individual situation and business structure.
- Business Income Taxes
- Payroll Taxes – (941) State and Federal Withholding, Social Security, Medicaid, and Federal (940) and State Unemployment Taxes.
- Franchise Taxes
- Sales Taxes (businesses that sale products and certain taxable services)
- Personal Income Taxes
- Self- Employment Taxes
- Payroll Taxes for Employees
- Franchise Tax
- Sales and Use Tax (Business that sale products and certain taxable services)
There are additional taxes, depending on the Industry, that require both Corporations and Non-Corporations to report and/or pay:
- Sales and Use Tax
- Excise Taxes
- Highway Taxes
- Many, many more
Do NOT allow business taxes to stress you out. Get educated. I have weekly sessions of Ask the Accountant to assist you with your accounting questions. Ask the Accountant will allow you access to an accountant on an as needed basis until you can are ready for a more consistent platform. Click here to learn more about ask the accountant.
Also, Get my free “Accounting Guide” to make sure your business is on track with accounting! The Guide is free with consultation!
Click Here to Get Your Guide and Consultation!
Accountants do not prevent you from receiving tax notices. The Accountant can help you manage the tax notices. All business entities will receive a tax notice at some point, even if you complete the tax forms and payments correctly. We work with computers and sometimes information does not update correctly. Accountants can research and respond to all tax notices as well as complete all tax calculations and forms to save you time and thousand of dollars. Use an accountant to delegate your accounting task and to assist with tax planning.