A Guide to Self-Employment Taxes for Entrepreneurs

Setting out on a journey of self-employment as an entrepreneur is exciting and challenging. You’ll be free to chase your dreams and passions while running your own business. However, it puts the responsibility of understanding and managing all tax-related obligations on your shoulders.

One of those obligations includes calculating self-employment tax, which applies to people who run their own businesses or organizations. Freelancers may also have to pay self-employment tax. Finding help with Tax Preparation in Los Angeles isn’t the hard part: comprehending the laws is.

What is self-employment tax?

Self-employment tax is what you must pay on your self-employment income. This includes income earned as an entrepreneur, freelancer, sole proprietor, business owner, or individual contractor. There are two components of self-employment tax: Medicare tax and Social Security tax. Employees’ taxes are usually withheld, but self-employed people have to pay the employer and employee portions.

The calculation method

• Medicare tax — For a self-employed person, the Medicare tax rate is 2.9% of net earnings, with no limit on income. An extra amount of 0.9% on Medicare tax may apply to money earned as a self-employed individual, which exceeds specific thresholds.
• Social Security tax — From two years ago, the rate of Social Security tax for self-employed people has become 12.4% on the first $147,000 earned. Half of the amount has to be paid as the employer’s share and the other half as the employee’s portion.

Credits and deductions

Self-employed people may be eligible for certain credits and deductions to reduce their liability. An expert in Tax Preparation Los Angeles can help you determine your eligibility. Here are the most common credits and deductions you may enjoy.

• Self-employment tax deduction — You can deduct 50% of your self-employment tax liability when you calculate your adjusted gross income. In doing so, you reduce your taxable income effectively.
• Qualified business expenses — You can cut off some of your regular and necessary business costs incurred while operating your business, such as equipment, office supplies, marketing expenditures, and travel expenses.
• Retirement contributions — Any contribution to retirement plans may be deductible, including Simplified Employee Pension (SEP), Individual Retirement Accounts (IRAs), or Solo 401(k) plans, reducing income tax and self-employment tax liabilities.

Rules to follow

Every self-employed person must adhere to the laws of self-employment tax.

• Quarterly estimated tax payments — You won’t have any taxes withheld from your income. That’s why you must make quarterly estimated tax payments to the Franchise Tax Board and Internal Revenue Service to cover your self-employment tax and income tax liabilities.
• Annual tax return filing — You must file an annual tax return with the FTB and IRS, stating your income, deductions, and credits. This tax return is usually filed using Schedule C, Form 1040, and Schedule SE.
• Keeping records — Every self-employed individual should maintain organized and accurate records of their earnings, expenses, invoices, receipts, and other financial documents. You’ll need them to support the data you provide during tax returns.

How to minimize self-employment tax

There are a few strategies you can implement to minimize your tax liabilities.

1. Leverage every available deduction for qualified business costs to reduce taxable income.
2. Keep contributing to retirement accounts to enjoy tax benefits associated with retirement savings, even tax-deferred growth and potential deductions.
3. Structure your organization as an LLC or corporation, which offers specific tax advantages, such as paying yourself a salary and distributable profits as dividends. These are subject to lower tax rates.

Conclusive statements

Charting a course through tax obligations requires a thorough understanding of all tax laws, rates, credits, deductions, and compliance requirements. As an entrepreneur, you must contemplate the intricacies of self-employment tax and incorporate plans to minimize your liability while remaining compliant with the state and federal tax norms. If you need professional support, contact a CPA before undertaking Tax Preparation in Los Angeles.