Don’t Forget The Self-Employment Tax
Cincinnati, OH | Posted: 12/20/2015 | Author: April Koenig
Ah, the benefits of freelancing. Setting your own schedule while avoiding that awful commute to work means complete freedom for contract artists, right? Well, not exactly. There are tradeoffs when working as a freelancer, and one of them is an extra obligation to the dreaded federal government. We’re talking about the Self-Employment Tax. As a freelance artist you should be ready to tackle this end-of-year expense, otherwise you could be blindsided with extra penalties and headaches. The following info should help in being prepared.
What Is The Self-Employment Tax? – Officially known as the SECA (Self-Employment Contributions Act), this is a freelancer’s version of the FICA (Federal Insurance Contributions Act) tax. The FICA tax is usually paid by an employer, going towards Social Security and Medicare. While as an employee you share this cost with your employer, but as someone who is self-employed you’re on the hook for this by yourself. The SECA is divided into two parts-
Social Security – You pay 12.4% for net earnings up to $118,000. Anything you make above that amount is exempt from Social Security tax.
Medicare – You pay 2.9% for all earnings, no matter the amount. So unlike Social Security, there is no ceiling.
Do I Have To Pay The SECA? – Plan on it. As a freelance artist – whether self-employed, sole proprietors, independent contractors and the like – you’re liable to pay the SECA. Hopefully experienced artists have dealt with this process, but those new to freelancing would calculate self-employment tax on a Schedule SE form and report that amount on their Form 1040 in the “other taxes” section. This way the SECA is differentiated from income tax.
Is It All Bad? – The answer is no, as taxes go. The IRS lets you claim 50% of what you pay in self-employment tax as an income tax deduction. For example, if your self-employment tax ends up being $2,000, your taxable income reduces by $1,000. Keep in mind the best way to deal with self-employment taxes is to consult your accountant, or the IRS directly. They can help you deal with SECA eligibility, estimation, and other deductions you may be able to take advantage of.