Self-Employment Tax Underpayments

Self-employment taxes are divided into two categories: Social Security and Medicare. Self-employment tax applies to people who work for themselves, hence the “self-employed.”   To pay these taxes, one must have a social security number or an individual taxpayer identification number. Everyone who works must pay Social Security and Medicare taxes. For 2011, the percentage was 7.65% for employees and 13.3% for the self-employed.

Self-employment tax is assessed via the Schedule SE (Form 1040). You can deduct half of your self-employment tax when determining your adjusted gross income. The self-employment tax rate is a certain percentage which may vary from year to year. For instance, the self-employment tax rate for 2011 was 13.3%--10.4% allotted for Social Security and 2.9% for Medicare. All of an individual’s wages, tips and net earnings are subject to any combination of the Medicare and Social Security taxes.

Under Section 2042 of the Small Business Jobs Act, a deduction towards income tax is allowed to self-employed people, for his or her cost of health insurance. This deduction is accounted for when determining the net earnings from self-employment. Schedule SE has instructions on calculating this amount.

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Who the government considers to be "self-employed" is determined if the individual:

Thus, one’s net earnings are subject to employment tax if either of the two points above is met. It shall be noted that the tax on a self-employed individual shall not be confused with one who is employed as a sole proprietor or independent contractor. These individuals generally use Schedule C or C-EZ to calculate their net earnings, rather than Schedule SE.

It is also important to distinguish caregivers from self-employed individuals. Special rules exist for workers who perform “in-home” services for the elderly or disabled—caregivers. Caregivers are seen as employees of those for whom they serve—the homeowners, elderly, or disabled individuals. An individual who is a caregiver should refer to the special rules when doing his or her taxes.

If determining self-employment taxes is a challenge for you, it is best to seek the services of a tax attorney. Tax attorneys will properly guide you on what you owe, and what you can deduct. Further, their services will ensure that you pay whatever you need to in order to avoid any penalties or adverse consequences.

Many people avoid going to tax attorneys because they feel tax attorneys will cost a fortune. This is not always true. For complex tax matters, legal fees will be high. However, for more straightforward matters, such as self-employment taxes, attorney fees are very reasonable. Also keep in mind that there are a number of payment options that you may arrange to pay your attorney. Also note that earnings from self-employment could affect your Social Security payments, should you be receiving them.

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