The main focus of self employment tax is to be able to collect Medicare and Social Security taxes from self employed individuals. If you are an employee, the first $113,700 of wages for 2013 is going to have a 12.4 percent social security tax applied to it. All of the wages have a Medicare tax applied to them at a rate of 2.9 percent. Unmarried individual’s have their wages above $200,000 applied with a 0.9 percent additional Medicare tax. This tax will be applied to the combined wages of you and your spouse in the excess of $250,000. Half of these federal employment taxes are going to be withheld from your paycheck. The other half will be paid by your employer.
You have to fill out the Schedule SE form in order to figure out how much self employment tax you will owe. You have to take your net business income from Schedule C if you’re a sole proprietor - or Schedule E if you’re a self employed business that’s being treated as a partnership. If you’re a farmer, then use Schedule F. Multiply that number by the factor of .9235. The result will be your self employed income for your tax purposes. The first $113,700 of your income is taxed at 15.3 percent. Any of the remaining self employed income will be taxed at 2.9 percent or 3.8 percent depending on the extra Medicare tax.
Usually, you don’t have to pay self employed tax on profiles from selling business assets that are not going to be considered as inventory. If you sell a small office building that has been used for years to house your business, you don’t have to put the gain from it on the Schedule SE form. Therefore, you don’t owe self employment tax on the gain, which can be very helpful, especially when you are trying to avoid overpaying. You can treat the entire gain as a low taxed long term capital gain instead. You can also deduct 50 percent of your self employment tax bill on page 1 of form 1040. The write off is available whether you are itemizing or not. You cannot deduct any of the new Medicare tax, however.
Many self employed individuals tend to do their own taxes, which can make this information very helpful by the time that tax season has arrived again. Unfortunately, there are so many forms associated with handling your taxes when filing as a self employed individual, it can be very challenging to determine whether you are handling everything correctly or even ensuring that you have filled out the correct forms. If you have any doubts about whether or not your tax estimates are correct, it is always recommended to get in contact with a local tax service and have them review your tax information. They will be able to provide you with a professional and experienced response and further guide your tax preparation.