Understanding Self Employment Tax Rates
The self-employed are facing more challenges than ever to determine their tax status. For the last several years the government has been tightening its self employment tax rules. In order to keep a company afloat in these tough times, it is essential to be aware of the current tax laws and regulations as they pertain to self-employment.
The self-employed have less income tax liability, so the only time that they will be taxed is when they have income tax returns. However, even if you do not have an income tax return and do not owe money to the government there is still some self-employment tax to be paid on any wages or other income you receive. If you are self employed and want to be treated as one, you may want to take a look at what is called a Schedule C-corporation and see if your business qualifies for relief under this classification. There are many different ways to determine if you qualify.
Most states charge a state income tax rate, which is typically based on filing an adjusted gross income, which includes most types of self-employment. However, there are states that allow tax exemption for those working from home, or those who work only part time. If your home-based business does not pay tax on the income it earns you may want to check with your state government on these possibilities. If you file an income tax return however, it is important to understand how the tax is calculated and whether or not the state will give tax exemptions.
There are also federal self employment tax rates that apply. The Internal Revenue Service sets the federal tax rate on a graduated scale based upon gross income. The tax rate is usually based on the highest annual amount earned by an individual or a business over a twelve month period, although the threshold amount can be adjusted yearly. If you are self employed, you should get professional advice from an accountant on the federal income tax rate that applies to you and your home-based business.
For those self-employed who are employed full-time or part-time, there are also self employment tax rates that apply. Some of these include the earned income credit, which gives additional tax relief to those who earn a good amount of money during a year. Certain types of business may also be eligible for reduced self employment tax rates, such as an S corporation or a partnership. When applying for this credit, you will need to prove your business is operated on a regular basis.
You may be able to reduce the self-employment tax rate by combining your business with another person or business. This is referred to as a partner arrangement. If you own more than one business and you work as a team, you may be able to get a much lower tax rate than a sole proprietor. Some businesses provide you with the opportunity to work as a partner for tax reasons, such as if you are a small business owner who has employees that are not owners. If you are married, you may be able to work with an accountant that specializes in tax issues if your partner is not working for you.
For people that have self employed health insurance plans, it may be difficult to meet the self-employment tax rates, because health insurance can be expensive to purchase and maintain. If you are self employed you may be able to get some relief by getting an HSA, or Health Savings Account. This allows you to have tax advantages on health insurance coverage, but is not taxable. The Health Insurance Tax Credit and Medicare Part D Plans are two programs that can help.
Many people are surprised to know that even though the self-employed have lower tax rates, the self-employed also have higher taxes to pay. You may be able to deduct your business expenses from your personal income taxes if you are self-employed and not paying other taxes like income taxes or social security. You may also be able to reduce or completely eliminate certain types of deductions depending on the type of business you run. Also, there are special rules for home businesses, so it is best to contact an accountant or tax professional to help you understand how your tax situation works.