2011 End of Year Tax Tips for Small Businesses - "Self Employment Tax"

If you are in business for yourself, or operate a business as a sole proprietor, there are sevreal end-of-year tips that the IRS would like you to know about self-employment.  Today, we're going to discuss the "Self Employment Tax".  (Keep reading our Blog for future tips about preparing for the end of the year as a small business or sole proprietor.) What is Self Employment Tax? If you are self-employed, you typically are required to pay a "Self-Employment Tax".  This is a tax consisting of Social Security and Medicare taxes for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the paycheck of most wage earners. You figure self-employment tax (SE tax) yourself using Schedule SE (Form 1040).  When you are figuring your adjusted gross income, you can deduct half of your SE tax. However, wage earners cannot deduct Social Security and Medicare taxes. Self-Employment Tax Rate The self-employment tax rate for self-employment income earned in 2010 is 15.3%.  However, the 2010 Tax Relief Act reduced the self-employment tax by 2% .  So, the self-employment tax rate for self-employment income earned in calendar year 2011 is now 13.3% (10.4% for Social Security and 2.9% for Medicare). For both 2010 and 2011, the first $106,800 of your combined wages, tips, and net earnings are subject to any combination of the Social Security part of self-employment tax, Social Security tax, or railroad retirement (tier 1) tax.  Any income you make over $106,800 will not be subject to the Social Security tax. Self-Employment Tax Deduction You are able to deduct half of your self-employment tax when figuring your adjusted gross income. This deduction only affects your income tax, not your net earnings from self-employment or your self-employment tax. You also may be eligible to claim the Earned Income Tax Credit (EITC).  You do this by filing a Form 1040 Schedule C.  To find out if you are eligible for this tax credit, you can visit the EITC page on the IRS website. Need help with end of year accounting for your small business or sole proprietorship?  Contact Pat Vavrek at "It All Adds Up" by calling (239)425-5188 or email italladdsupinc@comcast.net.

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