If you are running your small business or self-employment activity as a sole proprietorship, are you wondering what federal taxes you are required to pay? Read on to find out.
Here’s an overview of the three most common types of federal taxes for which the typical self-employed person can be liable:
1. Federal income tax. Your self-employment profit is subject to federal income tax. By “profit” I mean the extent to which your income exceeds your expenses, as shown on Schedule C, which is the form you use to report your income and expenses. The “bottom line” from Schedule C is transferred to page 1 of Form 1040 and is therefore added to all your other sources of income for the year.
How much income tax will you pay on your self-employment (SE) income? The answer to that question depends on a number of related factors – your total income from all sources (including the SE income as well as income from your spouse, if you are married and filing jointly), your deductions and exemption amounts, and the amount of taxable income as reported on your personal income tax return, Form 1040.
2. Self-Employment (SE) tax. If you have Schedule C profit of $400 or more, you will also be liable for self-employment tax. SE tax is the Social Security and Medicare taxes that all sole proprietors must pay on their self-employment income. Normally it is 15.3% of your Schedule C profit.
You also get a deduction for 50% of your SE tax on page 1 of Form 1040, so the actual amount of SE tax ends up being somewhat less than 15.3%.
The SE tax is calculated and reported on Schedule SE, and the total SE tax is then transferred from Schedule SE to page 2 of Form 1040 and is added to your income tax liability to determine your total federal tax liability for the year.
3. Employment taxes. If you have no employees, then you have no employment taxes. But if you do hire any employees, you will be responsible to pay the following employment taxes: federal income tax withholdings; Social Security and Medicare taxes (both the employee’s share and the employer’s share); and federal unemployment taxes. The frequency and amount of these employment tax payments can vary greatly. IRS Publication 15 is a good resource to learn more about your responsibilities as an employer.
Keep in mind that being a sole proprietor does complicate your personal income tax return, and that many of the tax forms required are not for the numerically faint of heart. It is usually best to hire a competent tax professional well versed in the world of self-employed tax issues.