Self Employment Income and Self Employment Tax

Everybody knows about the W-2 type of employees.  These employees work for a company and make a certain wage.  They get paid once every two weeks and taxes are taken out of their wages and they receive a check for the difference from the company.

Today, we are going to talk about Self Employment.  These are people who provide goods and services for a company or private citizens and get paid a flat rate without taxes being taken out of the amount that they are paid.  The IRS calls people who are self employed "independent contractors".  These people control the methods and means by which they provide services to others. The independent contractors are paid based on invoices that they send to companies.  The company pays the invoices based on the terms that are agreed upon between the independent contractors and the company or private citizen.  

At the end of the year, companies are required to send 1099s to these independent contractors if they pay them over $600.  The independent contractors are actually businesses if you think of it.  The simplest of companies is just the one individual working who is referred to as a sole proprietorship.  This just means that it is just a single person working.  The sole proprietorship that is owned by just one person files his taxes using the 1040 form but also includes the Schedule C to list his income and expenses.  He will be taxed based on his profit from the business that is listed on the Schedule C.  Self employment profit increases the income that will be subject to tax.  Self employment losses decrease the amount of income that will be subject to tax.  The following are some of the self employment expenses that will reduce the income on Schedule C:  advertising, car and truck expenses, commissions paid, insurance, interest, legal and professional services, office expenses, rent or lease expenses, repairs and maintenance, supplies, taxes, business travel, business meals and entertainment, and utilities, including telephone expenses.   

Self employment tax is calculated on Schedule SE (Self Employment Tax).  It is attached to the 1040 form.  Before adjusted gross income is calculated, there is an adjustment on the 1040 form that reduces the income that is subject to tax by 1/2. The self-employment tax is paid on self-employment profit. You need to pay self-employment tax if you had net earnings from self-employment of $400 or more.  The self-employment tax rate for self-employment income earned in calendar year 2015 is 15.3% (12.4% for Social Security and 2.9% for Medicare).  Taxpayers pay self-employment tax on 92.35 percent of their self-employment profit up to net earnings of $118,500.  The self-employment tax increases the total tax on Form 1040.