Self employment taxes: WTH??

[Mama Dragon]

I figured for every $2000 I make, the IRS wants $306 for self employment taxes. When DH was working, he paid about $100 per $2000 for soc sec and medicare...WHY am I getting taxed more?? Is there a way around it, besides obviously not claiming it all? (don't get all moral on me, I think taxes like this are a load of horse poo and have no problem with dodging them - I just want to be able to get EITC next year).

[tamagotchi]

You do get to deduct half of self-employment tax from your income taxes, so it's not quite that bad. Regular employees can't take that deduction.

You can also deduct any contributions you make to a SEP-IRA. You can contribute up to 20% of your self-employment earnings.

[tamagotchi]

(Removed my guess about why SE taxes are higher because Mama J Rock has a better answer below )

[Mama J Rock]

When you're self-employed you pay 15.3% in SE tax (social security and medicare) on your income tax return. If you are an employee, then they withhold 7.65% and the employer is responsible for the other 7.65%. So the govt still gets 15.3% per person, the difference is if you are are self-employed you pay both halves of it.

[Mama J Rock]

Oh, and if you're self-employed then you only pay SE tax on the "profit" not just your gross income, so if you get $2000 of income but you have $500 of expenses for running the business then you pay SE tax on $1500.

[traceface]

Just make sure you deduct *all* possible expenses related to self-emplyment. Including home office space, even if that is just your computer set up in a nook, you measure the square footage your desk, files, work-related stuff takes and figure out what percentage of your overall living space that represents

Then you can deduct that percentage of rent or mortgage, utilities, high-speed Internet, etc. It's worth looking at a book about taxes for the self=employed, because if you go aggressively go after every deduction you're entitled to, you can offset that 15% significantly.

[rainbowmoon]

does this apply to someone working as an independant contractor? (I assume so?)

[mrskennedy]

Applies to indie contractors too, b/c you're still pretty much self-employed, b/c the companies always say "You're not an employee. You agree that you're an independent contractor," etc. So : But it doesn't make paying the taxes any easier/more fun.

[Mama Dragon]

Wait - I only have to pay on the profit? Must research this, thanks!!

I've never in my life made enough to pay income taxes, so in that respect it doesn't help, unless business picks up *a lot*.

[Mama J Rock]

Yes, it's based on the profit. The tax form is a Schedule C and then that bottom line carries over to tax form Schedule SE, which walks you through the calculation of SE tax. It all ends up carrying to the 1040 which is your regular tax return that you file for income taxes.

[Mama Dragon]

Thanks, checking out schedule C now....I can deduct my signature advertising on mdc right?

[mommyddeville]

I want to read about starting a business and how to deal with the tax side of it. Is there a particular book or site that's really good and clear? I'm not worried about how to advertise, make a profit, etc. I just want to know about the tax info. Thank you.

[velochic]

Be careful about your deductions. I used to be an independent computer consultant back in the 90's. The tax laws changed and not to the self-employed person's benefit. For example, if you have a home office, you have to keep a log of the hours spent to do work, and the hours others in the family used the computer/office space for personal things. Same with phone... keeping a detailed log was necessary for everything. Deducting miles... if you didn't go over a threshold for the hours used as business, then you couldn't take a deduction. If you stopped off at the store on your way from a business site, you had to calculate those miles out of your way. Oh, goodness, it was just a PITA. I finally realized it wasn't worth the pennies I was saving in deductions to raise all of these red flags to the IRS and to have to save every teeny, tiny piece of paper with all of this data.

[Red Sonja]

Oooh, thanks for the tips, velochic!

[Kaitnbugsmom]

subbing. with graduation coming up in December and certification shortly thereafter, I want to learn as much as I can NOW so I'm more ready.