2 quick tips for paying self-employment taxes
For some, the downside of self-employment involves the complications of filing their own taxes. Working for a company as an employee, although with some issues out of your control, comes with the relief that someone else handles tax calculations.
Self-employment in Michigan
Like the IRS, Michigan defines self-employment as persons who operate a trade, business or profession by themselves as an independent contractor or sole proprietor. They report their earnings for Social Security and Medicare taxes when they file their returns. The following list contains two quick pieces of information for filing self-employment taxes.
- Reporting your income
Before determining if you have to pay taxes, you must figure your profit or loss. The process is as simple as subtracting your expenses from your income. You enter the totals – net profit or net loss – on the Form 1040. You must file an income tax return if your net earnings are $400 or more. Although your earnings may be less than $400, you still file a tax return. Income under $400 may not be subject to self-employment taxes.
- Calculating the tax
Currently, the self-employment tax rate is 15.3%. It consists of 12.4% for Social Security and 2.9% for Medicare. For 2019, you will figure the Social Security and Medicare portion of the tax on the first $132,900 of your net income. The IRS has a tax guide for small businesses on its website. If you have to pay withholding taxes, it may be best to make quarterly payments. Doing this means you will not have to pay a lump sum at the end of the year.
You have incentives for being a sole employee. The IRS lists several items that you can take as deductions, such as computer equipment, maintenance and car insurance and education pertaining to your job. Claiming part of your home as an office may help cut down your tax payment if you qualify.