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Self-Employment Tax Rules

Individuals that are subject to the self-employment tax will many times have questions regarding some aspects of the self-employment tax rules. Uncertainties of what the self-employment tax consists of or what is subject to the self-employment tax often leads to questions like the ones answered below by the Experts.

What is the self-employment tax?

The self-employment tax is a U.S. tax that is typically set at 15.30%. This is close to the equivalent of what the employer and employee would pay under the FICA tax. This FICA tax is a combination of two parts: 12.4% for Social Security and 2.9% for Medicare. There are limits in place that the self-employment tax applies to. For the Social Security portion, the self-employment tax only applies to the first $110,100 of income (based on the 2012 tax year). There is no limitation to the self-employment tax for the Medicare portion; it will be 2.9% on any amount. The portion that an individual pays in the self-employment tax that is normally paid by an employer is allowed as a deduction against the income. If self-employment tax liability exceeds $1,000 then the individual must pay the estimated taxes quarterly using form 1040-ES.

How does this self-employment tax compare with Federal Insurance Contributions Act (FICA) payments and payroll taxes that an employee pays on earned income?

The self-employment tax is how an individual that is not an employee pays FICA payroll taxes. The FICA tax has two components: Social Security and Medicare taxes. When an individual is employed, the employer pays half of the FICA taxes and the employee pays the other half. With self-employment, the FICA taxes are paid solely by the individual via the self-employment tax.

If someone receives a 1099 form from a company that they did police detail work, are police officers subject to self-employment tax on these police details?

Typically, the rule of thumb is if you do not have Social Security and Medicare taxes withheld from the pay for this police detail work then you are considered a self-employed person and can be subject to paying the self-employment tax. A quick way to find out is to look at the 1099-MISC form that you receive and if the amount paid to you is listed in box 7 (Non-Employee Compensation) they you are subject to the self-employment tax.

What can an individual do different to get their self-employment tax down?

If you are self-employed (essentially have your own business) and have a net business income then your net earnings will be subject to the self-employment taxes. You can reduce some of the strain of the self-employment tax by claiming qualified business expenses.

Are royalties from self-created work (music cues) subject to self-employment?

If an individual is “involved in an activity with continuity and regularity” they would be considered to be self-employed even if the income is classified as a royalty and could be subject to the self-employment tax.

Being educated with the right information and have a good understanding about self-employment tax rules can help when faced with questions regarding self-employment taxes. Experts can help with questions about the components of the self-employment tax or what is subject to the self-employment tax. Get the answers fast and affordably by asking an Expert.
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