Self-employed individuals must pay close attention to IRS regulations concerning income tax requirements and filing.
All earned income is subject to income tax as well as Social Security and Medicare taxes (“employment taxes”). The 12.4% Social Security tax applies only up to the Social Security wage base of $118,500 for 2016. All earned income is subject to the 2.9% Medicare tax (there is no cap). The employment taxes are split equally between the employee and the employer. However, if you are self-employed, you pay both the employee and employer portions of the employment taxes on your net self-employment income, which is the self-employment tax.
Higher-income taxpayers are also subject to an additional 0.9% Medicare tax. It applies to FICA wages and net self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately).
Deductions for the self-employed
As a self-employed individual, you are eligible for certain tax benefits. You will be able to take an above-the-line deduction for the employer portion of employment taxes (6.2% for Social Security tax and 1.45% for Medicare tax). (No portion of the additional Medicare tax is deductible, because there’s no employer portion of that tax.)
As a self-employed taxpayer, you may benefit from other above-the-line deductions. You may be able to deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You also can deduct contributions to a retirement plan and, if you’re eligible, an HSA for yourself.
Above-the-line deductions are particularly valuable because they reduce your adjusted gross income (AGI) and modified AGI (MAGI), which are the triggers for certain additional taxes and the phase-outs of many tax breaks. While these deductions may lower your income tax, they are not deductions from your self-employment income and therefore, will not reduce your self-employment tax.
Next week’s blog will address other tax considerations for the self-employed. For more information, please contact me at HZemel@BerdonLLP.com or your Berdon advisor.
Hal Zemel, a Tax Principal at Berdon LLP, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.