Re: 1099 work and employment taxes
Does anyone know what employment tax (Social Security and Medicare) a person
pays on 1099 work?
Would I be responsible for the entire approximate 15 percent? If so, does a
person get half back when completing a Schedule C at tax time?
Thanks,
Tom Herme
therme -at- frontiernet -dot- net
651-463-8327
State and federal income taxes will work the same as other income that is taxable (except that capital gains is a separate world).
Self-Employment Tax is 15.3% of 92.35% of your Schedule C net which means effectively a tad over 14% in addition to income tax. Taking the 92.35% prevents you from paying the "employee's" tax on the "employer's" tax, and the Social Security system's take is just about what the take is when you combine employer and employee shares in a W-2 scenario. The tax kicks in from the first dollar as long as you net $400. You stop paying most of it when your net hits a level that rises each year (2001 ceiling $80,400) . After that ceiling, the tax declines to 2.9% (the Medicare portion only) from 15.3%.
You get to deduct 1/2 of your Self-Employment Tax on your federal income tax return and for the purpose of most state tax returns to my knowledge. This lowers your effective income tax rate or self-employment tax rate depending on how you want to crunch the numbers. It's probably best to think of lowering the self-employment tax rate since the benefit only applies to self-employment income and not to any other income you may be paying income tax on. On the other hand, the benefit depends very much on how high your income is: There is no benefit if you pay no income tax and the benefit climbs as your marginal income tax rate climbs. If you are in a 15% bracket, the deduction shaves about 1% off your total taxes on the self-employment income only.
Some states and cities have other taxes. NYC has an Unincorporated Business Tax that used to hit every dollar but now only kicks in when you are making a pretty decent living. So you really need to know your own jurisdiction's laws and, as others have said, you really need to check with an accountant.
If you live in a high-tax locality like NYC and make a middle-class living, it's very easy to hit a 50% marginal tax bracket. If you or a spouse has W-2 income, increase withholdings. When you under-pay on a quarterly basis, penalties kick in.
Hope that helps,
Jeanne
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