Why Do I Owe Self-Employment Tax? A Guide for Brentwood, Tennessee Business Owners

Many self-employed people are surprised when they prepare their tax returns and discover that they owe self-employment tax in addition to regular federal income tax. This commonly affects independent contractors, consultants, freelancers, sole proprietors, and other small-business owners throughout Brentwood, Tennessee.

Self-employment tax helps fund Social Security and Medicare. The general rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. It is generally calculated on 92.35% of net self-employment earnings. Additional Medicare tax may apply at higher income levels.

Employees normally split Social Security and Medicare taxes with their employers. Self-employed individuals generally pay both portions because they are treated as both the worker and the employer. This is why a self-employed person may owe considerably more than someone who earns the same amount through a W-2 job.

Self-employment tax is based on net business profit, not total revenue. Ordinary and necessary business expenses reduce Schedule C profit and may also reduce self-employment tax. Properly recording advertising, supplies, insurance, professional fees, vehicle expenses, home-office expenses, and other eligible costs is essential.

If net earnings from self-employment are $400 or more, Schedule SE is generally used to calculate the tax. Self-employed taxpayers may also need to make quarterly estimated payments during the year. Waiting until tax season can result in a large balance due and possible underpayment penalties.

Tax Services of Tennessee helps self-employed professionals and small-business owners in Brentwood, Tennessee with tax preparation, bookkeeping, QuickBooks, estimated taxes, and year-round tax planning. Call 615-933-8292 or visit taxservicesoftennessee.com to schedule a consultation.IRS self-employment tax information





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