What the self-employed need to know about employment taxes

In addition to income tax, you must pay Social Security and Medicare taxes on earned income, such as salary and self-employment income. The 12.4% Social Security tax applies only up to the Social Security wage base of $118,500 for 2016. All earned income is subject to the 2.9% Medicare tax.

The taxes are split equally between the employee and the employer. But if you’re self-employed, you pay both the employee and employer portions of these taxes on your self-employment income.

Additional 0.9% Medicare tax

Another employment tax that higher-income taxpayers must be aware of is the additional 0.9% Medicare tax. It applies to FICA wages and net self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately).

If your wages or self-employment income varies significantly from year to year or you’re close to the threshold for triggering the additional Medicare tax, income timing strategies may help you avoid or minimize it. For example, as a self-employed taxpayer, you may have flexibility on when you purchase new equipment or invoice customers. If your self-employment income is from a part-time activity and you’re also an employee elsewhere, perhaps you can time with your employer when you receive a bonus.

Something else to consider in this situation is the withholding rules. Employers must withhold the additional Medicare tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So your employer might not withhold the tax even though you are liable for it due to your self-employment income.

If you do owe the tax but your employer isn’t withholding it, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or you can make estimated tax payments.

Deductions for the self-employed

For the self-employed, the employer portion of employment taxes (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. (No portion of the additional Medicare tax is deductible, because there’s no employer portion of that tax.)

As a self-employed taxpayer, you may benefit from other above-the-line deductions as well. You can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You also can deduct contributions to a retirement plan and, if you’re eligible, an HSA for yourself. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income (AGI) and modified AGI (MAGI), which are the triggers for certain additional taxes and the phaseouts of many tax breaks.

For more information on the ins and outs of employment taxes and tax breaks for the self-employed, please contact us.

© 2016

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2017 Social Security Limits have been issued

Social Security wage base increases next year. The Social Security Administration (SSA) announced that the maximum earnings subject to Social Security tax will increase from $118,500 to $127,200 in 2017. Next year, an employer must withhold 6.2% Social Security tax on the first $127,200 of employee wages and 1.45% Medicare tax on the first $200,000 of employee wages. On employee wages in excess of $200,000, employers must withhold 2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax).

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There’s still time to save both energy and taxes by making green home investments. The tax credit for qualified energy-efficiency investments in a principal residence is extended through 2016. It equals 10% of certain expenses (such as exterior windows and doors that meet Energy Star requirements) plus 100% of certain other expenses (such as qualified central air conditioners and water heaters), subject to a maximum overall credit of $500, reduced by credits claimed in earlier years. Additional rules and limits apply. For more information, contact us. 

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Summer jobs

Do you have a teenage child working this summer? In a summertime “Tax Tips,” the IRS offers several tips for young people with summer jobs. For example, students who are waitstaff should know that all tip income is taxable. They must keep a daily log to report their tips to their employers, and report $20 or more in cash received in any single month. And they must report all yearly tips on their tax returns. Go to http://bit.ly/29hJLa4 to see all the tips for student workers.

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Accounting for Startup Companies

dreamstime_m_55316177New businesses have many accounting needs that are often overlooked. Many new business owners may not think to contact an accountant until they are already in operation. An experienced accountant’s support in developing a business plan, wealth of financial knowledge, and access to resources is necessary to the foundation of a new company. Whether you are a first time business owner or a seasoned entrepreneur, a dedicated accountant can provide a much needed service to a business owner as a consultant, offering critical financial advice and aiding in several crucial business decisions before a company begins operations. These decisions can range from choosing an entity type, financing the company, hiring key personnel, and record keeping. Additionally, a knowledgeable accountant can work with your attorney to ensure that all tax issues are properly addressed in your legal documents.

90% of startups fail within the first five years.* By checking each and every box in the correct order on an ideal startup timeline, your business will have a greater chance of succeeding. It has also been found that an entrepreneur who does not ignore anything has better odds of lasting longer than five years. Initial financial needs cannot be ignored. Let us provide you the tools and resources to help you reach the top 10%. Read more

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Noncash Charitable Contributions

dreamstime_m_68107089The task of “spring cleaning,” a thorough cleaning of a house or room that can really happen any season, is one that many of us put off as long as possible. Though the chore of sorting through old furniture, clothing and household items no longer needed can be a thankless one to complete, the value of many items donated to charitable organizations can be deducted on your federal income tax return which means more money in your pocket and provides validation as a job well done.

To deduct the value of donated goods, the IRS requires that you keep a record of the donation. This includes the donation receipt from the charity, which includes the drop off date, and an itemized list of what was donated. One good practice made easier by technology: Use your smartphone to take a picture of the items, and of the receipt as a backup.

How do you know how much you can deduct on your return? First, make sure you are donating to a qualified, 501(c)(3), non-profit organization. Items must be in “good” or “nearly new” condition in order to deduct the donation on your tax return. The deductible amount is the current fair market value of the item. In other words, you can deduct the amount that you would expect to receive if you sold the item. Read more

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