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Self-Employment Tax 2012

Self-Employment Tax 2012

Several people tend to take up their own employment. IRS classifies them as self-employed income earners and tax payers. Here is an insight into the self-employment tax 2012 updates.
Scholasticus K
The concept of self-employment is the oldest form of business and employment. Hence, if you are self-employed and file for tax you won't be facing much of a difficulty or complications, if you comply with the expectations of the Internal Revenue Services (IRS). Broadly speaking, self-employed tax refers to social security tax and Medicare taxes.
Who is a Self-Employed Person
Now, when it comes to the term 'self-employment', there is a significant confusion over who is considered to be a self-employed person. The Topic 554 of the IRS, states some common definitions to define who is self-employed. People who are self-employed include:
  • Sole proprietors of businesses.
  • Partners in any kind of partnership, with any kind of liability.
  • Member of the multi-member limited company, known as LLC.
  • Qualified contractors who are working on any kind of contract.
  • Members of a joint venture.
Apart from the aforementioned conditions and definitions, any person earning more than $400 from a self-employed source is also liable to comply with the self-employed tax norms. The Form 1040 Schedule SE, is used to the self-employed taxes withheld and paid from income. As per the IRS, 92.35% of a person's income is subject to the tax. It means that 92.35% of a person's net income or earnings are taken into consideration during the income tax assessment. You don't have to do anything different about this as the percentage of your income that would eventually become subject to tax liability gets computed in the due course of filling the Form 1040 and all its schedule.
Self-Employment Tax 2012
There are two compliance that you would have to complete while paying your self-employed tax, namely, filing the Form 941 and filing the Form 1040 Schedule SE. The Form 941, is an absolute necessity which you would have to complete, especially if you have employees working for the business other than yourself. The Form 941 is to be filed on a quarterly basis and the taxes which have been withheld, have to be paid through the Electronic Federal Tax Payment System (EFTPS), for which you will need an Employee Identification Number (EIN), and Individual Taxpayer Identification Number (ITIN). If you are filing only for yourself, you will need your Social Security Number (SSN).
The 2010 Tax Relief Act reduced the tax rates for the financial year 2011 - 2012. However, if you are filing for years prior, then you will need to take into consideration related tax rates. As per the years prior to 2010, you will have to pay a tax of 15.3% (12.4% for social security and 2.9% for Medicare). After the 2010, rule amendment, that is for financial year 2011 - 2012, you will be liable for a different tax rate that is 10.4% for social security and 2.9% for self-employment, totaling up to 13.3% of self-employment tax. The 2011 amendment was initially for financial year 2011 - 2012 and thereafter.
In case your tax year is based on a fiscal year rather than a calendar year, you will need to refer to the rates and limits effective at the beginning of your tax year for the entire 12-month period. One must note that social security tax is applicable only on the first $106,800 of your earnings. On the other hand, Medicare is applicable for the entire income. Self-employed persons can claim a deduction under 'above-the-line' deductions for employer's share for social security (6.2%) and Medicare (1.45%).
In schedule C of your Form 1040, you can claim a tax credit known as Earned Income Tax Credit (EITC) which would basically reduce your income tax liability. Let's just cover up a couple of points. In cases where your income is unprojected and unpredictable, you will have to pay estimated tax against which a tax break on the form of tax credit would be redeemed for unused taxes. Secondly, exemptions, deductions and different rules are applicable for family caregivers and as per the Section 2042 of the Small Business Jobs Act, health insurance of self-employed people is deducted from net earning for both self-employment and income tax assessments.
While the tax rates for financial year 2012 - 2013 are yet to be declared, it is predicted that the self-employment tax rates may revert to 15.3%. This means, self-employed individuals must make provisions to pay higher taxes and plan accordingly for the next financial year. Besides, Social Security wage base will also see an increase in tax rate. Thus, individuals earning a wage base of $106,800 will have to pay more taxes.
Filing and actually paying the taxes is important, keeping up with the compliance of tax forms (i.e. Form 1040 schedule C and Form 941) is essential because it can result in legal implications.