7 things you might not know about self-employment taxes

Don’t let taxes dampen your enthusiasm

** UPDATED FOR TAX YEAR 2016

Maybe you’ve discovered that you have a passion for something, and you want to start a business to monetize that passion. So you lay out a plan to get your business started, and you jump into your new endeavor with excitement. You’re ready to make your mark on the world — but have you thought about self-employment taxes?

I know, taxes might be the last thing on your mind in the whirlwind of starting a business, but a bit of forethought goes a long way when it comes to self-employment taxes.

Self-Employment Taxes Forms

Here are seven things you might not know about the self-employment taxes that come with owning your own business.

1. You have to pay self-employment taxes even if you didn’t do that well in your business.

Maybe your first year isn’t that great. Maybe you didn’t get started until later in the year. Nevertheless, if the income from your business is over $400, you will have to pay self-employment taxes. So if the amount of your sales less your expenses to run the business is greater than $400, you will owe self-employment taxes.

2. You have to fill out extra tax forms.

I know you don’t want to hear this, but if you have started your own business and are reporting the income as you are supposed to, you will have to complete additional tax forms. Among these is a Schedule SE, Self-Employment Tax, which you use to calculate the self-employment taxes on the income from your company.

You calculate the income from your business on Schedule C, Profit or Loss From Business, which rolls on to Schedule SE.

3. You have to fill out the extra forms for each business.

Let’s say you have multiple passions that you want to share with the world. So you set up multiple companies to serve your customers. This means that you will not only need to keep track of each business in your tax software, you will need to complete the tax forms for each, including the Self-Employment tax forms. However, while you have to file out a different Schedule C for each business, you can consolidate the self-employment tax calculation onto one Schedule SE instead of a separate Schedule SE for each business.

4. If you and your spouse have separate businesses, you each have to fill out the forms.

There are a few advantages to being married and filing tax forms. To name a few, you do get a break on tax rates and only have to fill out one set of forms if you file married filing jointly.

However, just because you are consolidated in life doesn’t mean you are consolidated in everything.

If you and your spouse both have your own businesses, you will each have to file separate Schedule Cs and Self-Employment Tax forms for each business. And you do not get any reduced self-employed tax rates on the forms; you have to pay the same rates as everyone else.

5. If you were a partner with someone, you have to pay self-employment taxes.

You don’t get out of paying self-employment taxes if you form a partnership. The partnership itself doesn’t pay taxes — the income that is made is taxed on the individual partner’s tax return, and is considered income that is subject to self-employment taxes.

6. You get a partial tax deduction.

The IRS does give you a bit of break. After you have calculated the income from your business and the self-employment taxes, you enter both of these numbers on your tax forms.

  • The self-employment income goes on line 12 of your form 1040.
  • Half of the amount of your self-employment income goes on line 27 as a reduction in income.

This means that the amount of total income you are taxed on goes down a bit, reducing the total tax you owe on your income. You still have to list the self-employment taxes on line 57, but your tax burden wouldn’t be as high if you hadn’t gotten that break.

7. You do not owe self-employment tax on money you make from renting out a house.

If you are just bringing in some money from renting out an old house of yours, you do not need to worry about self-employment taxes. As long as you are not a real estate dealer, you are not liable for any self-employment taxes. The income from renting real estate is reported on Schedule E, Supplemental Income and Loss, and is not included in the calculations of self-employment income.

The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Image by: andresolnik via Visual hunt / CC BY-SA

Chris Peden
Chris Peden, CPA, CMA, CFM has spent more than 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information.