Although Social Security tax for self employed people is referred to as "self employment tax", it is actually a tax levied on self-employment income rather than on self employment itself. If your business reports a loss on form Schedule C of your tax return, then you have no self employment income and you do not owe any self employment tax.
Taxable Self Employment Income
Self-employment tax is calculated relative to net business income, or the amount left over after subtracting deductible expenses from revenue. The fact that your company generated revenue by providing products or services does not automatically make you liable to pay self-employment tax because your company could still report a loss if it spent more than it earned. In fact, you could be exempt from self-employment tax even if your business reports a small profit because you must earn a minimum of $400 to be subject to the tax.
Self Employment Tax
Once you reach the $400 threshold, the amount you owe in self-employment Social Security tax will be double the rate a typical employee pays. Because you are both employee and employer, you must pay both the employee's and the matching employer's share. As of 2014, the employee Social Security tax rate is 6.2 percent of gross wages up to $113,700, and employers pay a matching 6.2 percent. Self-employed contractors pay a total of 12.4 percent.
Self Employed Medicare Tax
Medicare tax from self employment is part of your combined self employment tax, and generally follows the same guidelines. If you take a loss from your business, or if you earn less than $400, you owe no Medicare tax. If you earn more than $400 from your business, you owe both the employee's share of 1.45 percent and the employee's matching 1.45 percent. Unlike Social Security tax, there is no cap on the taxable amount subject to Medicare tax.
Other Sources of Income
Although you do not owe Social Security tax on business revenue if your company takes a loss, you may nonetheless owe Social Security tax if you have a job to supplement your business income. Unlike self-employment tax, which you must calculate and remit yourself, the Social Security tax that you owe on earnings from a job is withheld and remitted by your employer. Your W-2 form will contain the details of these job-related Social Security withholdings.
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