Are you self-employed? Then Tax Day comes with an extra task for you. If you gain income from your business, even if it is a side gig, freelancing or contract work, then you need to estimate your taxes for the following quarter. In the U.S. Tax system, there is a pay-as-you-earn deal. If you do not have an employer that is withholding taxes from your paycheck, then you have to own up to the IRS as you make money throughout the year!
What is FICA and how do you calculate it?
As an entrepreneur, you need to know your FICA tax rate. What is FICA? It is an acronym for Federal Insurance Contributions Act. FICA is commonly used in the U.S. when referring to the combination of the Social Security tax and the Medicare tax. A self-employed person’s FICA tax rate for 2018 is 15.3% on the first $128,400 of net income. There will be an additional 2.9% on the net income in excess of that $128,400.
What does the FICA rate include?
The FICA tax rate includes the following:
The employee’s portion of the Social Security tax, which is 6.2% of the first $128,400 of net income
The employer’s portion of the Social Security tax, which is 6.2% of the first $128,400 of net income
The employee’s portion of the Medicare tax, which is 1.45% of all net income with no cap
The employer’s portion of the Medicare tax, which is 1.45% of all net income with no cap
What this means for you, the entrepreneur
As an entrepreneur, you need to be very disciplined and pay the tax out of your own pocket. The IRS considers you to be self-employed if you carry on a trade or business as a sole proprietor or independent contractor. You will also be considered self-employed if you are a member of a partnership that carries on a trade or business. Now, part-time businesses also count as self-employment, also limited liability companies. If you make less than $400 from your self-employment income, then you are exempt from paying any tax. However, if you make over that amount, then you must file a tax return and pay the tax, even if your total income would otherwise leave you not having to prepare a return at all.
Keep this in mind………..
You will notice that self-employment tax is usually roughly twice what you will see if you were an employee. Now, you will want to keep in mind that self-employment tax gets charged on your business profit, however the IRS lets you count the employer half of the self-employment tax, or 7.65%, as a business deduction for the purpose of calculating the tax. The IRS requires you to make payments quarterly in order to cover your tax obligation. Remember, these are estimated quarterly payments. This is because you don’t have an employer to withhold your taxes from you, and it is truly up to you to make sure you pay your taxes in a timely manner.
You can use Form 1040-ES to help you determine the appropriate amount to pay. The form also provides instructions that can help you avoid potential penalties, so you can plan for your tax payments accordingly.