Self Employment Tax – what you need to know
Understanding the self employment contributions act (SECA) tax is a must for
anybody considering being self employed. Basically, the SECA is what you have to
pay when you’re self-employed. When somebody else employs you, they help pay the
Federal Insurance Contributions Act (FICA) tax that withholds your social
security and Medicaid taxes.
Smartly building a career requires knowledge of tax laws
When you look at positions advertised at job search sites like
Career Builder or Dice.com, you need to find
out if the salary there is as an employee or as a self employed contractor. Why?
For a self employed contractor, the rate must be higher. The salary for the self
employed needs to be higher because:
1. The self employed pay more employment taxes. The SECA tax is a hefty 15.2%.
That’s because when you’re self-employed, you’re responsible for your entire
social security tax. Previously when you were employed by somebody else, you and
your employer split the social security tax requirements).
2. The self employed pay for their own health insurance and any other insurance
you may want coverage for (life and business insurance, for example). When you
are employed by somebody else, often times the employer subsidizes your health
care.
3. The self employed work less paid hours. Self employed people spend a certain
amount of their time advertising, looking for jobs, and taking care of
administrative tasks for which they don’t make money.
When starting a business, you must decide what form of business entity to
establish. Your form of business determines which income tax return form you
have to file. The most common forms of business are the sole proprietorship,
partnership, corporation, and S corporation. A Limited Liability Company (LLC)
is a relatively new business structure allowed by state statute. Legal and tax
considerations enter into selecting a business structure.
- Sole Proprietorships : owned by one individual
- Partnerships : relationship existing between two or more persons who join to
carry on a trade or business.
- Corporations : prospective shareholders exchange money, property, or both, for
the corporation's capital stock
- S Corporations : exempt from federal income tax other than tax on certain
capital gains and passive income
- Limited Liability Company (LLC) : owners have limited personal liability for
the debts and actions of the LLC
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