Self-employment in 2021

Who are the self-employed?

The self-employed are people who work for themselves. They can be nannies, tutors, freelancers, or translators with a special tax regime with reduced rates.

Self-employed become representatives of the most different spheres: agriculture, medicine, real estate, law, construction, IT sphere, creative directions, etc. But these people know in advance that they will have to pay a special tax – Self-employment tax, which is 15.3% of profit (12.4% – social funds, 2.9% – health insurance).

The second payment for the self-employed is the federal income tax. It ranges from 10 to 40% of profits. Its amount depends on profits: the least pay those whose annual income does not exceed the nontaxable minimum income – 10 thousand dollars; the most – the self-employed with an income of more than 414 thousand dollars a year.

How do self-employed people pay taxes in the United States?

You are not paid a salary, you work for yourself as a self-employed person. This status requires you to pay a social tax called a self-employment tax. You should know that social contributions to Social Security and Medicare become obligatory if your profit (with deduction of expenses) reaches the amount of $400. For people whose activities are connected with churches, the amount is different – 108.28 dollars. Such payments must be made until your income reaches $137,700.

Calculation rules

You need to fill out Appendix C to Form 1040, get the value of taxable income (line 31), and then multiply it by 92.35. If the value is not more than 400 ($108.28) dollars, then you do not belong to the payers. If the value is more than 400 ($108.28), you will have to pay the tax. Here is a simple example. Let’s say your profit on sales in Etsy was $ 550 (minus expenses). Multiply 550 by 92.35, it turns out 508 dollars. So, you should pay the tax. It is important to remember! This tax is levied on self-employed persons of any age and regardless of whether they receive Social Security payments!

Form 1099-MISC (other income)

The 1099 form independent contractor will also come in handy.

Form 1099-MISC reflects amounts received by your account as dividends, stock lending and tax-free interest payments, and gross income from consultant fees and soft-dollar fees.

Line 2 – Deposits: Generally, royalties are paid on contributions to natural resource companies.

Line 3 – Other Income: Distributions received on shares loaned out.

Line 7 – Gross income from fees received by advisors: Please note that the January 31 Form 1099 MISC is provided for this type of payment.

Line 8 – Payments “as of” (PIL) interest and dividends: Payments equivalent to interest and dividends. These amounts replace regular interest rates or dividends when your securities are loaned.

Details of income from consultant/broker fees and stock issuance fees are included on the annual statement. Details of distributions as dividends or tax-exempt interest, as well as additional details about margin rates, can be found on your annual dividend statement. For more information, visit this blog page.

What does the tax go to?

Self-employment tax goes to a federal fund that finances social benefits, benefits for the elderly, the disabled, and victims of accidents and natural disasters.

After each payment of the tax, the amount transferred is recorded on your paycheck with a point credit.

The amount of the tax

The tax has two components:

  • Social Security (12.4%).
  • Medicare (2.9%).

If there is an employment relationship, half of the payroll taxes are paid by the employer. And when you calculate your taxable income, you deduct this part. You calculate your self-employment tax and fill in 50 % of it on line 27 of Form 1040, thanks to which your taxable income becomes smaller.

Reporting

Payments are reported in SE, with your annual return (Form 1040) and Schedule C.

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