NEW YORK (MainStreet) Taxes are due on Tuesday just in case anyone had somehow forgotten. For most people filing taxes is a relatively straightforward, if unpleasant, chore. Since the government withholds income on a biweekly basis, and the standard deduction comes to more than most people could itemize, the average 1040 is a straightforward affair.
In fact, about 75% of Americans will actually get a refund this year.
Not so for the self employed. We live in an entirely different world and need to play by different rules. For everyone out there working to pay his own way, April 15 is considerably more complicated and, frankly a lot more expensive. If you're an entrepreneur, here are a few things you should know.
The Self-Employment Tax
Everyone who works for himself has to pay the self employment tax. This refers to the portion of Social Security and Medicare that your employer would otherwise pay, but which you now have to cover instead.
Anyone who works has to pay Social Security and Medicare tax, which in 2013 is 15.3%. For employees, their employer picks up the first half of that, but anyone self-employed has to cover the entire tax. For those playing along at home, that's an effective increase of 7.65% for having the audacity not to work for someone else.There are a few breaks here (although you'll still end up paying more). First, the IRS considers this a business expense and allows you to deduct the employer half of your total Social Security and Medicare taxes as far as income tax is concerned. Basically, you get to treat yourself as your own employee.
Second, this only applies to net income, so apply the self-employment tax after you've calculated the rest of your business deductions. Finally, the tax only applies to 92.35% of your net business income (your income after deductions). Reducing the base taxable income, plus the deduction, helps to level the playing field between the entrepreneurs and employees.