Among the many factors to consider when becoming self-employed is the impact that taxes will have on any future income and success of the business. What is a self-employment tax and what are the rules to consider when deducting Medicare for those who are self-employed? These are just a small number of questions that each person who works for themselves must answer.
Most employees in the work force typically have Social Security and Medicare taxes figure up and withheld from their paychecks by their employer. According to the IRS’s website, self-employment tax is similar in that it is made up of Social Security and Medicare taxes for those who work for themselves.
As most have taxes calculated by their employers, self-employment tax is calculated using Schedule SE (Form 1040). Self-employed individuals can also deduct the employer-equivalent portion of SE tax when figuring adjusted gross income.
Self-Employment Tax Rate
For 2020, the self-employment tax rate is set at 15.3%, with the Social Security tax rate accounting for 12.4 percent on self-employment income up to $132,900 and 2.9% for Medicare for the entire earnings.
Social Security taxes are not paid on earnings above that amount, but there is no such cap for Medicare contributions.
The IRS has also stated that those who are self-employed and receive Medicare can potentially deduct all Medicare insurance premiums. Medicare recipients who have self-employment income may deduct the premiums they pay for Medicare coverage, the same as the premiums for any other type of health insurance.
Who Pays a Self-Employment Tax?
Virtually all net income from being self-employed is subject to self-employment taxation. More specifically, anyone who has earnings that are $400 or more in a year, must report those earnings on Schedule SE. This tax also applies for those who had church income of $108.28 or more.
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