Did you work as a sole proprietor or independent contractor in 2016? If you earned more than $400 during 2016 from the work you did, you may owe self-employment tax. That’s true no matter what your age – even if you’re receiving social security benefits.
The tax is assessed on your earnings from self-employment. In this context, “earnings” generally means your self-employed income after deducting expenses incurred while operating your business. If you have multiple businesses, you combine the net income and losses. For your 2016 return, the self-employment tax rate is 15.3% on the first $118,500 that you earned.
What happens when you earn social security wages or tips from an employer and also have a side business? Your wages count toward the taxable base. Depending on how much you earn as an employee, your self-employment income may be subject to part or all of the tax.
You can pay self-employment tax on a quarterly basis as part of your estimated tax payments. One half of the total self-employment tax that you pay during the year is deductible on your income tax return, and you don’t have to itemize to claim the deduction.
Are you new to self-employment? Give us a call. We’re happy to help you make smart tax decisions.