This blog is specifically for the person who is self-employed and isn’t familiar with one of the biggest refund killers in the tax world – self employment tax.

When you work as an employee instead of free lance, your employer is required to withhold 6.2% social security tax and 1.45% medicare tax from your paycheck as well as federal and state income taxes plus any local or disability taxes.  Then the employer has to match the social security and medicare tax, with the combined employer and employee taxes totaling 15.3% of your wages, of which each pays 7.65%.

It is different when you are self employed.  You are an independent contractor and your “employer” (actually customer since you are self employed) is not responsible for any taxes you might owe; they just pay you a lump sum.  You have an advantage of being able to deduct your expenses against this income, but then you owe income tax on the net.  You also owe self employment tax on the net, which is both halves of the social security and medicare taxes (the IRS allows half the self employment taxes paid as a deduction against this, so instead of 15.3% of the net, it is actually 14.13%.)  So in addition to your federal and state income taxes, you will owe this tax, which if you don’t plan for it, can make for a devastating surprise when you prepare your taxes.

One last thing to remember – if you don’t want to pay a penalty, you need to start making estimated payments during the year to keep your taxes up to date, and the self employment taxes have to be part of it, but that is a story for another day.

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