Self Employment Tax – Peak Reliance

The Self Employment Tax in California in 2022: All You Need to Know

October 13, 2022

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Accounting, California, CPA, Taxes

You may love working for yourself, but it comes with its fair share of challenges. Self-employment taxes are just one of those challenges, but they’re not as scary as they sound. Self-employment tax is an optional tax that all self-employed workers in the U.S. must pay on their taxable income from self-employment activities. Self-employment tax is basically a combination of two different taxes: social security and Medicare taxes. Both these taxes are commonly referred to as “self- employment” or “SE” taxes. In addition to discussing the self-employment tax in California in the following article, we have also included information about the pros and cons of being self-employed so that you can make an informed decision before taking this career path.

What Is the Self-Employment Tax?

Self-employment tax is an optional tax on the income you earn from self-employment activities. Self-employment tax is basically a combination of two different taxes: social security and Medicare taxes. The social security tax rate is 12.4% (9.1% for employer and 3.3% for employee), and the Medicare tax is 2.9%. Just like wages earned from working for an employer, self-employed workers are required to pay the employee portion of these taxes out of their own pockets. Self-employed workers must pay the employer portion of these taxes as well. Self-employed workers are responsible for paying the entire self-employment tax themselves. An employer does not step in to pay the employer portion of these taxes as they do when you are an employee.

How to Calculate Self-Employment Tax

Calculating self-employment tax is relatively simple. To calculate the tax, multiply your self-employed net earnings by the following rates: 12.4% for social security and 2.9% for Medicare. Since you are both the employer and the employee, you will be responsible for paying the employer portion of the taxes, which is 12.4%. So you will multiply your self-employed net earnings by 12.4% and then subtract the result from the amount you actually earn from self-employment activities. Let’s look at an example to make sure you have a good grasp of the whole process. Say you earn $35,000 from self-employment activities. You will multiply the $35,000 by 12.4% and come up with a result of $4,700. Next, you will subtract the $4,700 from the total amount you earned from self-employment activities ($35,000), and you will have your taxable self-employed net earnings.

When Are Self-Employment Taxes Due?

You have to pay self-employment taxes when you file your annual return for self-employment activities on the 1040-SE form. The deadline to file this return is usually the same as the deadline for filing your 1040: April 15th. Keep in mind, however, that you can apply to have the deadline extended to June 15th if you aren’t able to file your 1040-SE by the due date, but you will have to pay a $100 late fee.

How Much is the Self-Employment Tax?

The amount of self-employment tax you will pay will depend on your net earnings from self-employment. As we’ve already discussed, the self-employment tax is calculated by multiplying your net earnings from self-employment by 12.4% for social security and 2.9% for Medicare. If your net earnings from self-employment are $37,000, for example, your self-employment tax will be $5,309 – $4,489 for social security and $820 for Medicare. Self-employed workers are allowed to deduct the employer portion of their self-employment tax when calculating their total income tax. For example, if you earn $37,000 on which you owe $5,309 in self- employment tax, the $5,309 will be subtracted from your taxable income, and you will only have to pay taxes on the remaining amount.

Pros of Being Self-Employed

More Freedom: When you’re self-employed, you have the freedom to set your own hours, choose your own projects, and work from home. This flexibility allows you to have a more balanced life and spend more time with your loved ones. More Control: When you are self-employed, you have control over the projects you take on and the clients you choose to work with. You are also able to set your own rates, which means you can charge what you’re worth. More Money: Since you may be able to charge more as a self-employed worker than you would if you were an employee, you may be able to earn more as a self-employed worker.

Cons of Being Self-Employed

Higher Taxes: Since you have to pay the full amount of self-employment taxes yourself, you will end up paying more in taxes as a self-employed worker than you would as an employee. No Health Insurance: You will not be eligible to receive health insurance from an employer if you decide to go out on your own. And you will have to pay for your health insurance out of your own pocket. No Retirement Plan: Employees are offered retirement plans from their employers, but since you are self-employed, you won’t have this option. As a self-employed worker, you will have to save for retirement on your own. No Paid Vacation: When you are employed by an employer, you are entitled to paid vacation days. But as a self-employed worker, you will have to save money for vacation days.

Final Words: Is Being Self-Employed Worth It?

Being self-employed comes with its fair share of challenges, but it can also be extremely rewarding. In addition to being able to set your own hours, control your own projects, and charge what you’re worth, you will also have to pay higher taxes and take care of your own retirement savings. Being self-employed can be worth it if you are prepared for the extra challenges and sacrifices that come with this career path.

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Accounting, cpa, Online CPA, Self Employment Tax, Self Employment Tax in California, tax