Updated: Oct 05, 2023
We know, taxes are not the most exciting thing to talk about. Unfortunately, as a business owner, you need to know this one. We created this article to help you understand the ends and outs of the dreaded Self Employment Tax.
Individuals who work for themselves, such as content creators and influencers, must pay the government the Self-Employment Tax. Since you work for yourself and no one is automatically withholding taxes from your paycheck, it is up to you to pay these taxes.
If you’ve ever worked a “normal” job with a paycheck, you probably noticed that your employer deducted social security and Medicare from every paycheck. These are called FICA taxes and everyone must pay. That tax was equal to 7.65% of your gross earnings.
What you probably didn’t know is that the 7.65% was only half the amount owed. Your employer was responsible for the other half. So in total, the government was getting 15.3% in these FICA taxes.
Being self-employed has one downside: you are responsible for BOTH portions of the FICA taxes because you serve as both the employee and the employer. That means you will be paying 15.3% of your net earnings to the IRS. It really sucks.
Yes, that is the unfortunate cost of being your own boss. But there are way to reduce your tax liabilities that we will get to in a bit.
Different business structures will determine how you will calculate the Self-Employment tax. If your business is structured as an LLC, calculating your Self-Employment Tax liability is fairly simple, but is pricey.
As an LLC, you calculate your self-employment taxes on your net income. Net income is calculated by taking your total business income less your deductions. That’s why it is important that you maximize your business deductions (without getting cute) to reduce your taxable income. We don’t need to be paying more than necessary, right?
For example: Let’s say you made $70,000 in gross income, but you spent $20,000 in business expenses. Your net income will be $50,000. After applying the 15.3% tax rate to your net income, you will owe $7,650 in Self-Employment Taxes ($50,000 x 15.3% = $7,650).
Operating as an S Corp can give you some major relief when paying self employment taxes. Since this business structure requires payroll, you have to set a reasonable salary for yourself. The amount of income you dedicate to your salary is subject to the Self Employment tax, while the remaining (the distribution) is not subject to the Self-Employment Tax.
Let’s say you earned $100,000 and $50,000 is your set reasonable salary. On that $50,000 salary, you will pay self-employment taxes. The remaining $50,000 is your distribution and is not subject self-employment taxes. Based on your location, you will still need to pay state and local taxes.
I know what you’re thinking, “I’m gonna set my salary as low as possible to avoid paying as much in self-employment taxes”. While we admire your creativity, that logic is not going to fly with the IRS. You still have to set yourself a “reasonable” salary; it just wouldn’t make sense to have a net income of $50,000, but only be paying yourself $2,000, right? The general rule of thumb is to make 50% of net income your reasonable salary and the remaining 50% your distribution.
Due to the nature of Influencers work, your income can fluctuate month to month. That’s why it’s a good idea to have tax experts like us, to make those adjustments so you aren’t over or underpaying on self-employment taxes.
Since self-employed individuals don’t automatic have taxes withheld from their income throughout the year, the IRS expects you to make quarterly estimated tax payments. By doing so, you are covering your tax liability and avoiding a large tax bill at the end of the year. To do this correctly, here’s step by step instructions:
If you are making more than $12,000 per year, the answer is yes.
The IRS Estimated Tax Worksheet can help you determined your estimated payment. This will be different for anyone filing taxes. To keep it simple, you will account for income, adjustments and deductions, as well as any credit you qualify for.
An easy rule to follow is this: Take your total income and deduct your expected expenses. Then multiply that amount by 15.3%. This is a rough estimate of what you will owe.
You do NOT need to file Form 1040-ES. This form is just used to help you figure out your estimated payments. The form is broken down into 4 separate sections to account for each payment period. All you need to do is fill out personal info( name, address, SSN, etc.) and your estimated tax payment that was calculated on your Tax Worksheet.
Instead of filing out this form, we suggest just paying the estimated tax online (see next section)
There are different ways to payment your quarterly taxes. If you really want to, mailing a check or money to the IRS is an option. But, we recommend making payments on the IRS website. It’s fast and easy to navigate. When you use this option, be sure to select “Estimated Tax” as your reason for payment.
Since your income is not a consistent number everyday, quarterly adjustments will need to be made so your payments are accurate.
When you file your annual tax return, report your total estimated tax payments on Form 1040, Schedule 3. The IRS will compare your estimated payments to your actual tax liability, and you may receive a refund or owe additional tax. The goal is too not owe anything or receive a tax return.
Keeping up with business income and expenses can make calculating estimated tax payments easier. We recommend working with an accountant or tax expert to make sure you are making proper payments. Or save some time by working with us, we’ll for it for you!
In addition to the federal Self-Employment Tax, you may have state and local self-employment taxes. This varies based on the state you live in so make sure you are keeping up with those too.
I know, 15.3% is a lot! Don’t be discouraged by this number. There are ways to pursue your entrepreneurial goals while also minimizing your tax liability. The best way to minimize this tax is to take advantage of every deduction possible. Be sure to check out some of our guides on deductions.
The QBI is designed to provide tax relief for business owners; this means you. It allows self-employed individuals operating under an LLC to deduct 20% of their business income from their taxable income. Though there are certain circumstances that allow you to qualify for this deduction. You’re business income and other income must fall below a certain amount to qualify.
As of 2022, all income must fall below $170,050 for single filers or $340,100 for joint filers.
Deducting taxable income is a great way to reduce your tax liability. If you want to see if you’d qualify for QBI, talk with us!
Becoming an S Corp could allow you to reduce your self-employment taxes. By setting yourself a reasonable salary, you will only have to pay self-employment taxes on that portion of your income. While the remaining distribution is free of self-employment taxes, you’ll still need to pay state and local taxes. That’s still a win to me!
What if I told you there’s a retirement plan that can lower your self-employment tax liability? Investing in your future and reducing your tax bill; it’s the best of both worlds. A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a retirement plan specifically for self-employed individuals to contribute and save for retirement. As of 2022, you can contribute up to $66,000 and that amount is 100% deductible.
Unfortunately, no matter what you do, you cannot completely avoid taxes. It’s important as a business owner to keep up with those self-employment taxes and make accurate quarterly tax payments. This will avoid having to pay a large tax liability at the end of the year and not get penalized by the IRS. The fluctuations of content creator and influencer’s finances can make calculating tax payments a difficult task to bear. Luckily, we are here to simplify your life and do the boring stuff for you!