In this episode, Gordon goes solo and talks about the “T- Word” and how it is that time of the year again. You guessed it, taxes! We learn about self-employment taxes and how to withhold things from your check. Then, Gordon explains Social Security and Medicare taxes and why you may need to consider sales and franchise taxes. Later, Gordon reveals when starting his business he invested in QuickBooks to assist with his payroll, taxes, and expenses.
How Income Tax Is Different For The Self-Employed
Most people are aware that they need to pay income tax. However, in addition to income tax, we also have to pay Social Security tax and Medicare Tax. If you get a pay stub, you will notice that it is broken down for you. It’s usually 3-line items plus other deductions from your pay, such health insurance, and retirement benefits.
What most people are unaware of though is that employers are required to pay half of your Social Security and Medicare Tax that is due. This part is not deducted from your paycheck. It is an expense for the employer; regular employment is taxed very different from self-employment. 15.3% of what you earned is automatically taxed across the board. As an employee, your employer pays half of that.
Currently, the Social Security tax is 12.4% of your earnings. If you are employed you are only deducted half of that, 6.2% and the employer pays the other half. When you are self-employed, you have to pay the full 12.4% on your net profit. (I’ll explain this later)
Currently, the Medicare tax is 2.9% of your earnings. Like Social Security, you are only deducted half of that; 1.45% and the employer pays the other half. For those that are self-employed, you pay the full 2.9% of your net profit. (Again, more on that later.)
So for people that are self-employed, they are required to pay a minimum of 15.3% of the net profit their business each year just for Social Security and Medicare Taxes. In addition to this, you are required to pay income tax based on your tax bracket and withholding allowances.
The Good News and Bad News Of It
So the good news about being self-employed is you only pay taxes on your profit as a business. You have probably heard from many people that you can “deduct” business expenses. This means that any legitimate business expenses (rent, telephones, office supplies, travel for continuing ed, utilities, etc.) can be “deducted” from your total income. Then you only pay tax on the amount after those deductions have been subtracted (aka, profit).
Remember Gross Income – Expenses = Profit (or Net Income)? You only pay taxes on the profit. Here’s an example.
Total practice income for the year = $50,000.00
Total practice expensed for the year = $25,000.00
Net Income is then = $25,000.00
Social Security & Medicare Tax would be $25,000.00 x 15.3% = $3825.00
Then, you would also owe income tax on whatever your tax bracket and standard allowances are. So in this example, for a married person filing the tax jointly is 10% (based on 2019 tax table).
$25,000 x 10% = $2,500.00
So total tax owed for the year would be $2500 + $3825 = $6325.00
Of course, everyone’s tax situation is going vary based on tax credits and allowances given for things like child care, college tuition, student loans, etc. Those are other things you can deduct for depending on your situation. So even in this example, your total tax could (and probably will be less.
AGAIN, CONSULT WITH A TAX EXPERT TO KNOW WHAT YOUR SITUATION WOULD BE!
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Meet Gordon Brewer, MEd, LMFT
Gordon is the person behind The Practice of Therapy Podcast & Blog.He is also President and Founder of Kingsport Counseling Associates, PLLC. He is a therapist, consultant, business mentor, trainer and writer. PLEASE Subscribe to The Practice of Therapy Podcast on iTunes, Stitcher and Google Play. Follow us on Twitter @therapistlearn and Pinterest “Like” us on Facebook.