Self-Employment Tax Considerations For New Business Owners
Employers deducted Social Security and Medicare taxes directly from your paycheck when you were an employee; but as an entrepreneur or small business owner, these payments must come directly from you.
Your estimated tax payments must be made quarterly in order to avoid underpayment penalties, but there may be self-employment tax deductions available that can help alleviate some of your obligation.
Sales Tax
People who work for themselves as sole proprietors, members of partnerships or limited liability companies structured as partnerships must pay an additional self-employment tax in addition to income taxes. The SE tax consists of Social Security and Medicare taxes. Individuals typically report their SE taxes on Schedule C or Form 1040 and may deduct half as an adjustment against gross income. If you belong to a religious sect that holds conscientious objections against accepting private or public insurance plans, however, this may exempt you from having to pay SE taxes altogether.
Social Security and Medicare taxes may be straightforward for business owners to comprehend; however, sales tax compliance can often be more challenging. LumaTax makes sales tax compliance simple with automated filing software for only a few dollars per month – perfect for managing sales tax compliance as part of running their companies!
Employment Taxes
Self-employed individuals don’t have federal and state taxes taken out automatically from their paychecks like W-2 employees do, meaning their take-home pay may be greater. However, they still must adhere to all of the same tax payment obligations and should keep a reserve fund ready in case any employment taxes (commonly referred to as SE tax) need paying on.
Current SE tax rates stand at 15.3% and cover Social Security and Medicare contributions. It applies to individuals operating sole proprietorships or partnerships; general members of limited liability companies (LLC); or S corporation shareholders reporting their distributive share of business income on Schedule SE for 2023 tax filing season.
Based on your size and other circumstances, depending on how large your operation is you may need to submit quarterly estimated tax payments online or by mail. Publication 505 – Tax Withholding and Estimated Taxes provides more details. In order to reduce SE tax burden you can also claim deductions for expenses like advertising, professional services and supplies as business expenses.
Health Insurance Deductions
Contrary to the income tax system where employers remit payroll taxes withheld from employee paychecks throughout the year, self-employed individuals must remit Social Security and Medicare taxes themselves on their net business profits – known as self-employment (SE) tax.
Self-employed individuals can take great comfort in knowing they can deduct 100% of their health insurance premiums for themselves, their spouse and dependent children – an impressive deduction which will substantially lower their end-of-year taxes.
Small businesses meeting certain criteria may also establish healthcare reimbursement accounts, known as Qualified Small Employer Health Reimbursement Arrangements (QSEHRA), to reimburse employees for individual health insurance costs. Unfortunately, such arrangements can often involve many complexities and paperwork requirements that make this option impractical – instead most may opt to offer group coverage instead. Typically shareholders in S corporations do not incur SE taxes when performing services for their companies.
Marketing Deductions
Advertising costs associated with expanding your customer base are tax deductible, such as designing and printing brochures, building websites, purchasing social media ads or hiring an accountant or attorney to assist in filing taxes. You can even claim expenses related to hiring such experts.
Hiring contract labor can also be tax deductible; just ensure any worker you employ for jobs that pay $600 or more receives form MISC-1099.
Entrepreneurs must consider more than self-employment tax and payroll taxes when running their businesses. Entrepreneurs should account for state and local sales and use taxes; take note of their legal structure to understand its effect on tax liabilities; make quarterly estimated tax payments or risk incurring underpayment penalties – these payments can be made online or by mail; for more information, consult a tax professional. The Internal Revenue Service also offers comprehensive guidance regarding which expenses qualify as tax deductible expenses for small businesses.
