Self employment taxes refer to taxes that are paid on income that has been received from being self employed, or as the sole proprietor of a business. When filing a tax return in the United States, self employment taxes are paid to the Internal Revenue Service (IRS), and declared on a Schedule SE that is completed and submitted with the rest of the tax return documents, such as the the 1040 form.
Because tax laws can change every year, and may certainly be different in other countries, it is important to review the changes and learn the local rules on the amount of taxes that need to be paid on earned income as well as the way the income must be declared. Freelancers, independent contractors, or sole proprietors of businesses are all examples of individuals who may need to pay self employment taxes on income they have earned from working throughout the year. Citizens of the one nation who earn income in other countries often must declare this income on their tax returns, though many nations do have tax treaties so that people do not end up owing taxed to both countries.
It is necessary to calculate self employment taxes based on a certain percentage of earned income; this is because self employment taxes will typically only need to be paid if net income is over a certain amount. Tax rate percentages can change every year as well, so it will be necessary to look these up and complete the calculations to figure the amount of the tax. Free calculators can be found online, and many tax preparation software programs will do these calculations and create the tax forms automatically. It may also be possible to deduct a portion of the self employment taxes paid from the adjusted gross income, which can reduce the remaining income taxes owed.
People who work as freelancers or contract employees will typically need to make quarterly estimated tax payments throughout the year, of which self employment taxes are a part. Tax agencies offer worksheets to help individuals estimate their quarterly payments. Underpayments or skipping the estimated tax payments altogether can lead to significant tax penalties at the end of the year, so it is very important to calculate these figures and make the payments on time.
