There are alternative methods that can be used for figuring liability of self-employment tax and they are: The Farm Optional Method and the Nonfarm Optional Method. These methods may qualify an individual to claim a larger Earned Income Credit or Child Tax Credit; they may also, however, increase your self-employment tax liability.
The maximum amount of earnings subject to self-employment tax is currently $87,000.00. Now, when figuring your adjusted gross income on Form 1040, you may deduct up to one-half of your self-employment tax liability and if you are member of the ministry or clergy you may request an exemption from self-employment tax from the IRS.
When must self-employment taxes be paid? Generally, the self-employment taxes aren’t due until the end of the year, when your personal tax return is filed. Why is it this way? The self-employment tax isn’t due until the end of the year simply because of the fact that many self-employed business owners don’t file the net profit or net loss figures on their self-employment earnings, until the year’s end. If there is a net loss, the self-employed individual receives a credit of self-employment tax due, in the amount of one-half of the amount due.
The self-employment tax is the self-employed individual’s equivalent to the social security and Medicare tax deducted from employee’s pay check each week. The wage earner’s taxes are configured by their employer and are deducted on a weekly basis. The self-employed individual isn’t required to make weekly payments of self-employment tax, but they are held liable for the full 15.3 rate, that is split between the employee and the employer in wage earning situations. In general, however, if you expect to owe taxes in excess of $1000 for the year, you are required to pay estimated taxes each quarter.
In summary, if you are self-employed, have net earnings of $400 or more, and file a tax return, you will be subject to self-employment tax. To learn more about individual liabilities, exemptions, and alternative tax methods, please visit the online site for IRS Forms and Publications at the IRS website. Topic 554, Publication 517 and 533 will provide more detailed and situation specific information.