The New Economy
By Bernard Freeman
Self-Employment on the Rise
Do you own a small business, perform a service for a living or are otherwise a member of the so-called Gig Economy, freelancers or contractors who work as ride-sharing drivers or other nontraditional forms of employment? If so, you’re one of 24 million Americans who are self-employed.
While the self-employed enjoy certain freedoms, other workers do not — such as working remotely, setting their own hours and being their own boss — they also must deal with the tax challenges for income that comes to them without taxes and deductions withheld. The self-employment tax accounts for Social Security and Medicaid deductions and is paid for by individuals using the 1040 form Schedule SE, either with annual or quarterly payments.
Self-employed persons often say they are “double taxed,” by which they mean they take on the burden of paying for Social Security, Medicare and Medicaid taxes normally paid partially by employers. Traditionally, employers pay 6.2% of the Social Security tax, with the employee paying the remaining 6.2%, plus1.45% for Medicaid. With an employer payment, the entire tax 12.4% falls on the self-employed.
But who is classified as self-employed? The IRS uses the following criteria. You are self-employed if you are:
- An independent contractor or sole proprietor of a business;
- Part of a partnership of a business or trade;
- In what the IRS calls “other business” in some capacity, or part-time;
- Made $400 or more in net earnings from self-employment, or $108.28 or more for church employee income; or
- Spouses in joint-ventures.
Self-Employment Tax Deductions
The self-employed are also unique in their available deductions, the largest of which is the ability to subtract half of the self-employment tax. Unfortunately, the Tax Cuts and Jobs Act of 2017 also did away with some cuts and deductions for the self-employed, but several still remain.
For home workers, the IRS allows a home-office deduction that also includes property taxes, insurance and utilities, among other expenses. Other deductions include a 20% deduction for pass-through entities, which excludes some of your income from taxes, and health care premiums.
Business expenses such as cell phone and internet service, office supplies, software and computers are also deductible, as are advertising expenses, websites and business travel.
These deductions help ease the burden on the self-employed, but the best advice to lessen the blow is to pay taxes quarterly. Otherwise, annual penalties for some self-employed individuals can be levied come April 15.