May 14, 2020

If you are employed, your boss probably pays many of your taxes for you. Your pay stubs will show withholding for federal income tax, Medicare, and FICA. At the end of the year, you will receive a W-2 showing your total earnings from your job and the total amount of taxes withheld. Self-employed people must also pay these taxes, and they have to handle all of the details themselves. To understand whether you have to pay the self-employment tax, you need to determine whether you are “self-employed” for federal tax purposes, and whether you make enough from self-employment to need to pay the tax. Our Los Angeles tax advisors can help you assess these factors.

What Is the Self-Employment Tax?

It might be easiest to define the self-employment tax by comparing it to the taxes paid by employed persons. A typical employee has two types of tax withheld from their paychecks. The first is their individual federal income tax withholding. The amount that their employer withholds from each paycheck is based on the information they provided on Form W-4.

The other type of tax, commonly known as “payroll tax,” goes towards Social Security and Medicare. The Social Security portion is often known as the FICA tax, after the Federal Insurance Contributions Act. The employer withholds the following percentages of the employee’s gross wages:
– 6.2% for Social Security; and
– 1.45% for Medicare
The employer must match these amounts. While the employee pays 7.65 percent of their paycheck, the total amount received by the government equals 15.3 percent.

The self-employment tax combines the employee’s and employer’s contributions to Social Security and Medicare. Self-employed taxpayers must pay 15.3 percent of their net earnings. The apportionment of the tax is the same as it is for payroll taxes: 12.4 percent goes to Social Security, and 2.9 percent goes to Medicare.

How Do I Know if I Am Self-Employed?

First, the easy part of the definition: If you receive a W-2 from your employer, you are not self-employed. If you receive a 1099, you are probably self-employed.

Self-employment generally means that you are your own boss. If your employer tells you when to come to work, where to sit or stand while you work, and how to do your job, you are not self-employed. If you get to decide when you go to work and how long you work, and your employer only gets to see finished or semi-finished products, you are most likely self-employed. The line can be blurry in some situations, such as with drivers for rideshare companies.

Paying Self-Employment Taxes

Anyone who makes more than $400 in net self-employment income must pay the self-employment tax. This is part of the legal distinction between a “hobby” and a “business.” People who work for churches that are exempt from payroll taxes must also pay self-employment tax if they make more than $108.28 in a year.

Self-employed people can make quarterly estimated tax payments using Form 1040-ES. You can wait and make a single payment when you file your tax return, but if you owe more than $1,000 in self-employment tax, you will have to pay a fine to the IRS.

If you need help with an issue related to payroll tax in California, the Enterprise Consultants Group’s tax advisors are available to answer your questions and address your concerns. Please contact us today online or at (800) 575-9284 to schedule a consultation with a member of our team.