The tax that self-employed people are obligated to pay to the government is referred to as self-employment tax. The levy is used to pay for Medicare and Social Security. For 2020, the self-employment tax rate is 15.3% of your net income. 12.4% of this tax rate goes to Social Security, while 2.9% goes to Medicare. Since you are both the employer and the employee if you work for yourself, you must pay the entire tax rate of 15.3%.
Your self-employment tax will be determined based on your net earnings if you are self-employed and make $20,000 annually. To get your net earnings, first subtract your business expenses from your gross income. Your self-employment tax would be $2,754 ($18,000 x 15.3%) if your net earnings were $18,000.
You might not owe any federal income tax if you made less than $10,000 per year, but you might still have to pay self-employment tax. However, you can be qualified for a tax refund if you overpaid your self-employment tax. When you submit your tax return, you can claim the refund.
You might need to submit taxes even if your self-employment income was merely $500. You must file a tax return and pay self-employment tax if your net self-employment income is $400 or more. You are exempt from filing taxes if your net income is under $400. However, since you might be qualified for specific tax credits or deductions, it might still be a smart idea to file.
It’s crucial to remember that you must record any income, no matter how little, on your tax return. Penalties and interest charges may apply if not all sources of income are reported. As a result, you must disclose any income you have received on your tax return, even if it is less than $500.
In conclusion, everybody who is self-employed should take self-employment tax into account. Your net income and the applicable tax rate will be used to determine the amount you owe. To make sure you pay the proper amount of tax, it is crucial to maintain precise records of your business’s earnings and expenses. It is advised that you speak with a tax expert if you have any queries regarding self-employment tax.
According to the article, some occupations—such as some government employees, some foreign workers, and members of some religious groups who have vowed poverty—are free from paying self-employment tax. It’s crucial to remember that the exemption laws can be complicated, so it’s always better to speak with a tax expert to assess your unique circumstances.