self-employment taxes
Definition
When you work for an employer, your employer pays half of your Social Security and Medicare taxes while you pay the other half through paycheck withholding. When you work for yourself, the IRS considers you both the employer and the employee, so you owe both halves of those taxes, which adds up to 15.3% of your net self-employment income. The good news is that you can deduct half of what you pay in self-employment taxes when calculating your regular income tax.
Example
If your small business earns $60,000 in profit after expenses, you would owe roughly $9,180 in self-employment taxes on top of your regular federal and state income taxes.
Watch Out
Many new business owners get blindsided by this tax because no one withholds it for you automatically, so you need to set aside money throughout the year and make quarterly estimated tax payments to avoid a painful bill and penalties in April.
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This definition is for informational purposes only and does not constitute legal advice. Please consult with a licensed attorney for legal guidance.