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Self Employment Tax Self-employment tax is the Social Security and Medicare tax for self-employed individuals. This includes individuals who receive compensation from other individuals or businesses in the form of a1099-MISC, non-employee compensation. In many cases, individuals starting a business or becoming independent contractors for the first time fail to plan or consider this tax on their income. It can be a real shock at the end of the tax period when the realization hits that this tax is due. The self-employment tax on net earnings can be substantially more than the income tax, especially for a small business with less than $50,000 in net earnings. Only business expenses can be used to reduce the income that is subject to self employment tax, whereas business expenses and certain personal expenses are used to reduce the income that is subject to income tax. If your net earnings from self employment or independent contracting is less than $400, then you have no self-employment tax obligation. The self-employment tax rate is 15.3 per cent. That 15.3% consist of two parts: 12.4% Social Security and 2.9% Medicare. The 12.4% applies to the first $94,200 of your wages in 2007. This base does change or increase at different points in time. The 2.9% applies to all wages, even if they are in the millions. If you have not done so already, consult an accountant or CPA who has an emphasis on taxes—not all financial consultants do. Make sure you are properly planning for this tax burden in 2008. Eddie White is an accountant with a special emphasis on taxes. His business is housed at The Enterprise Center, The Edge Connection business incubator. If you need assistance with your accounting, you can contact him at 770-377-8673.
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