Understand Self-Employed Taxation for 2023
Self-employed business owners have to pay self-employed contributions act, or SECA, taxes in addition to regular income tax. These types of businesses include sole proprietorships, partnerships, and S corporations. Self-employed business owners must pay 15.3% of net income for Social Security, Medicare, and Old Age Survivors and Disability Insurance. Workers who are not self-employed only have to pay 7.6% of net income, while their employer covers the other half of this amount. Essentially, self-employed business owners must pay the employee and employer halves of these income tax requirements. 2.9% of this amount is sent to Medicare with no upper limit in sum, while 12.4% of this amount goes to Social Security with an upper limit of $117,000. While this may be a large percentage of income, self-employed business owners are able to deduct half of the SECA amount on personal tax returns.
Download Our Free Brochure →Self-employed business owners also have to make estimated tax payments, because an employer is not there to withhold taxes for them. Estimated taxes can be figured using IRS Form 1040-ES, Estimated Tax for Individuals and the tax return from a previous year. Worksheets are included in this form which will assist new business owners with estimating earnings for their first year of operation. If estimates are too high or too low, worksheets for the next quarter must reflect the adjusted amounts.
How self-employed business owners report their earnings depends on the type of business that the owner runs. Sole proprietorships must prepare a Schedule C or C-EZ form to calculate earnings and what must be paid for taxes. In a partnership, Form 1065 is prepared for the partnership as a whole, while Form K-1 is sent to each partner to report individual earnings and what is owed for taxes. The information obtained for a K-1 is then transferred over to a Schedule E. When a Limited Liability Company is formed, an agreement is made with the IRS for how the organization will be handled for taxes. For example, if an LLC is considered a sole proprietorship or a partnership, tax information must reflect as such.
