As a small business owner, you will agree that the United States’ tax system is considered to be one of the most complicated ones. And if you do not have enough experience or knowledge in this sphere, it is too hard to handle this process without a professional’s help. Things become especially complicated when it comes to taxes.
As a rule, taxes which are associated with employees are considered to be the most complicated ones. Therefore, today, tax professionals from Prestige Auditors are going to tell you the main differences between the terms “self-employment tax” and “employment tax” which always become a reason for confusion for most U.S. business owners.
The main difference between these two terms is that self-employment tax is paid by self-employed individuals. At the same time, employment taxes are paid by employees and their employers. But, let’s dive deeper and try to understand the main aspects concerning both Self-employment and Employment taxes.
Generally, these types of taxes are paid by self-employed business owners to the Security Administration for Medical or Social Security reasons. As a rule, the amount of paying taxes is based on revenue that your business shows.
As a business owner, you should be aware of the fact that the tax rate for self-employment income is 15.3%: 12.4% for Social Security and 2.9% for Medicare. Generally, this amount is based on the individual’s business income.
Employees must pay only half of this amount; another half is paid by employers. But, if you are a business owner, then you have to pay the entire amount by yourself. However, there are some cases when business owners are allowed to take half the tax off their personal tax return and reduce their adjusted gross income. But, they are still allowed to get credit for the full amount of the self-employment taxes. It is wise to also mention that a self-employed person pays income taxes on the profits from their self-employment.
How to Pay and Report Self-Employment Taxes!
The process of reporting self-employment taxes is pretty simple, since they are reported on the business tax return for the owner. Generally, most business owners prefer to use Schedule C for reporting income as part of their personal tax return. After receiving your business net income, you should use Schedule SE for calculating and reporting the self-employment tax. Another important fact that you should be aware of is that self-employment income is not withheld during the year; therefore, most business owners have to pay quarterly estimated taxes from their income tax and self-employment tax. Once you fail in this process, you will receive IRS penalties.
Employment taxes are paid by employees for federal income tax for Social Security and Medicare tax. Employees have to withhold these taxes from their employee’s paychecks and report them to the IRS. Federal income taxes are withheld from the employee’s pay.
The total amount of FICA taxes is shared by the employee and employer based on the amount of their income.
How to Report and Pay Employment Taxes!
Both FICA and income taxes are withheld from employee pay and are reported to the employee by the employer with FormW-2. This information should be included on the employee’s tax return.
Another part of employment tax is a Federal Unemployment tax which is paid by the employer in order to provide unemployment benefits to employees
What If You Have Both Self-employment Income and Employment Income?
In case you are both self-employed and an employee, you have to pay income tax on income from all sources, including self-employment income and employment income. You will have to pay self-employment tax for Social Security and Medicare; additionally, your employer (who is in this case, well, you!) has to collect FICA taxes from your wages. Both self-employed individuals and employees pay the same taxes; however, the self-employed have to pay these taxes based on their business’s income. At the same time, these taxes are withheld from employees’ paychecks and are paid on their individual income tax return.
If you have any additional questions concerning taxes, contact our team and we will gladly provide you with the answers to all your questions. You can also visit our website where you can find more information concerning taxes, taxes and investing, how are investments taxed and tons of other information about business and taxes.