Considering Self-employment?

Considering Self-employment? If you\’re thinking of starting a business venture, you\’ll want to understand how your business income would be taxed. As a self-employed person, you\’d be responsible for paying both income taxes and self-employment taxes on your earnings.

Income taxes.

Many self-employed individuals operate as sole proprietors. A sole proprietor doesn\’t file a separate federal income-tax return for the business. Instead, the income and expenses of the business are summarized on a form (called Schedule C) that is included with the proprietor\’s personal income-tax return.

For liability reasons, you may decide to form a limited liability company (LLC) instead of operating your business as a sole proprietor. Assuming you don\’t have co-owners, you generally would report the LLC income and expenses on Schedule C, just as you would with a sole proprietorship.

Self-employment (SE) taxes.

A self-employed person who earns at least $400 from the business has to pay SE taxes on the earnings. SE taxes basically mirror the Social Security and Medicare taxes paid by employees and their employers and are partially tax deductible.

• For 2013, the SE tax rates are: $ For Social Security – 12.4% of the first $113,700 of self-employment earnings
• For Medicare – Generally, 2.9% of the first $200,000 of earnings and 3.8% on earnings in excess of $200,000 If you are married and file a separate return from your spouse, the 2.9% rate applies to the first $125,000 of earnings and the 3.8% rate to earnings over that amount. If you and your spouse are both self-employed and you file jointly, the 2.9% rate applies to the first $250,000 of your combined self-employment earnings and the 3.8% rate to earnings in excess of $250000.