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4 Self-Employed Tax Burdens Business Owners Should Never Overlook

There’s a huge difference between what a business owner pays in taxes versus what his or her employees pay – not just for the business but for themselves. Business owners don’t get a paycheck but they still have to pay Uncle Sam. Whether just starting out in business or not, there is a lot to know and understand about the cost of doing business in the United States.

For business owners and the self-employed, this is especially important as every penny counts when you’re your own boss. In business, as in all areas of life, planning is essential. So it’s critical not to sleep on these four things until tax season comes around.    

 

 

1. FICA Taxes

FICA stands for Federal Insurance Contributions Act and requires employers to withhold three separate taxes from employees, a 6.2 percent Social Security Tax, a 1.45 percent Medicare Tax, and a .9 percent Medicare surtax for employees making more than $200,000. 

Now, that’s what the employee sees on their paystub. What they don’t see is what the employer must also pay, which is another 6.2 percent for Social Security and another 1.45 percent for Medicare. There is no employer’s portion of the Medicare surtax, so the total between the employer and the employed comes to 15.3 percent for FICA taxes.

 

2. Federal and State Unemployment Taxes

Whether you have employees, pay unemployment insurance, or do neither of these things, you’re going to be filling out IRS form 940 every year. This is where an employer pays for Federal Unemployment to employees who are laid off every year. The FUTA tax is a flat rate of six percent but paying it on time can reduce your tax burden to as low as 0.6 percent. 

Not bad. 

State unemployment taxes, of course, vary by state, so ask your accountant to be certain but if you don’t have employees filing unemployment insurance claims, your burden is likely to stay at around two to four percent. If you have employees that you pay for more than 20 weeks, or to whom you pay at least $1,500 a quarter, you’re going to need to plan for FUTA and SUTA taxes. 

 

3. SECA Taxes

If you’re purely self-employed as an independent contractor, freelancer, or consultant, things may be a little easier for you if you don’t have any employees. SECA, from the Self-Employment Contributions Act, filers have a different route every year. they pay the SE Tax which includes contributions to Social Security and Medicare. As the employer’s contributions and the employees’ contributions to those taxes add up to 15.3 percent on every paycheck, the self-employed earner pays 12.4 percent for Social Security and 2.9 percent for Medicare. 

A total of 15.3 percent. 

 

4. Your actual income taxes

Self-employed earners and business owners have to pay the IRS an estimation of their quarterly taxes, and failing to do so will only incur further fines and interest at tax time. To save on the time, money, and headache it would cost to face the taxman in April, all you need to do is calculate your projected annual earnings and use that to determine a tax rate on page seven of the 1040 Form-ES, the tax forms used by self-employed earners. Locate your filing status and then your project earnings on the chart and the form will tell you what your tax burden is. 

Again, it’s important to determine this right away, so as not incur fines and interest payments!

Author
Blake Stilwell

Blake Stilwell is a former Air Force Combat Photojournalist with degrees in Graphic Design, Television & Film, Journalism, Public Relations, International Relations, and Middle Eastern Affairs. He is now a writer and media producer with experience in politics, entertainment, development, nonprofit, military, and government. Blake's work can be seen on Military.com, We Are The Mighty, Military Times, Business Insider, Fox News, ABC News, NBC, HBO Sports, the White House, Skillset Magazine, Booze League, and with considerable effort, his mother's fridge. Blake is based in Los Angeles but is often found elsewhere.

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