Sole proprietors do not contribute to the social security and Medicare system through payroll deductions. Instead, they pay these taxes with their federal income tax. Even though this is an annual form, we are discussing it now because it must be calculated and paid quarterly with IRS 1040ES.
You don't have to make quarterly payments on social security or Medicare if your net self-employment income was less than $400.
Forms to use
Schedule SE Social Security Self-Employment Tax
How often
Quarterly deposit with IRS 1040ES.
Annual reporting requirement. Include Schedule SE with your 1040 personal return.
Tax rate
There are two parts to this tax:
| Social security | 12.4% (.124) of the first $118,500 of net income from your sole proprietorship |
| Medicare | 2.9% (.029) of ALL net income |
| Total | 15.3% |
If you are used to only 7.65% payroll deductions, self-employment taxes seem high. However, employers have to match employee deductions. Therefore the REAL cost for regular employees is the same as what self-employed people pay.
Earn more than $200,000? There is a .9% Additional Medicare Tax on wages above $200,000 ($250,000 if married filing jointly). Click here for details.
More info
Please note:
Recalculate quarterly
Because your first year's income will be sporadic, you should re-calculate your social security self-employment tax each quarter.
Another job? Use Long Sch SE
If you also earned regular wages (or tips) that were reported on a W-2 form, AND the total wages plus your business' net income exceeded $118,500, you must complete Part I of the Long Schedule SE so that you do not pay too much social security tax. This is because social security taxes are only paid on the first $118,500 of your salary plus business net income.
Medicare is paid on all net business income, regardless of your salary from another job.
How to complete Sch. SE
Lines and what to enter
If you are completing this to determine quarterly taxes: Enter your results on IRS 1040ES, line 11.
If you are completing final year-end tax returns: Enter your results (line 5) on IRS Form 1040 line 57 and ½ of the amount from line 5 on Form 1040, line 30.
Net income under $1,600? Long Sch. SE
If your net income was less than $1,600 and also less than 2/3 of your gross income, there is an alternative method of calculating social security self-employment tax. It will probably increase your taxes, but it will also increase the social security benefits you are entitled to. The worksheet is on the back of the Schedule SE (Part II).
Other employees?
Social security taxes for employees (i.e. non-owners) must be paid using different forms. See IRS 941, EFTPS payment for federal employment taxes and your state quarterly employer forms.
New tax rate
The social security self-employment tax maximum wage limit changes annually.
To pay
Social security self-employment tax should be paid quarterly with 1040ES. Schedule SE should be completed annually and mailed with each taxpayer's 1040 annual return.
Questions?
Call the IRS information hotline (800) 829-4933. For forms, call (800) 829-3676 or obtain them online at http://apps.irs.gov/app/picklist/list/formsPublications.html.
Pay quarterly estimated income tax payments on your business' net income.
Forms to use
1040-ES Worksheet, coupons and instructions
Amount due 15% to 39.6% on your share of the business' net income (plus your other personal income).
| Single | Married | Hd Hsld Mar | Mar/Fil Sep | |
|---|---|---|---|---|
| 10% on first $ net income | 9,226 | 18,450 | 13,150 | 9,225 |
| 15% on next income up to: | 37,450 | 74,900 | 50,200 | 37,450 |
| 25% on next income up to: | 90,750 | 151,200 | 129,600 | 77,600 |
| 28% on next income up to: | 189,300 | 230,450 | 209,850 | 115,225 |
| 33% on next income up to: | 411,500 | 411,500 | 411,500 | 205,750 |
| then 35% to 39.6% |
To avoid penalties
To avoid penalties, you must pay 90% of this year's tax or 100% of last year's tax in normal employment withholding or estimated tax (this form). There are special requirements if your household income was over $169,740 or you are a fisherman. Please see 1040ES instructions.
How you should complete the form.
Lines and what to enter
Due dates
April 15, June 15, September 15, January 15.
To pay
Questions?
Call the IRS information hotline (800) 829-1040. For forms, call (800) 829-3676 or obtain them online at http://apps.irs.gov/app/picklist/list/formsPublications.html.
Forms to use
How often?
Quarterly payment requirement
Tax rates
of the business's net income. Note: You should NOT be deducting payroll taxes (income tax, unemployment insurance, etc.) on any money that you take from the business as a business expense.
Each city's business requirements vary. The following is a general description of these requirements.
Before you sign a lease or purchase equipment:
Verify that your proposed location complies with zoning requirements (including parking requirements and fire regulations).
Find out from the city building department if there are any code compliance issues.
If you are preparing food, talk with the County Environmental Health Department to verify that they will allow you to use existing equipment and facilities.
Zoning Permit
Usually you only need to get a zoning permit if you are changing the use of a building or if you are starting a home occupation business. Cities charge a nominal fee for home occupation permits ($50 is common). However businesses which want to change the existing use of a building may pay a fee, depending on the complexity of the request.
Business Tax/License
Most cities require anyone who conducts business in their city to obtain a business license and pay a business tax each year. The initial business license fee is usually the minimum business tax plus an administrative fee. In future years, the business tax is based on gross receipts, number of employees, or other criteria. The exact criteria depends on your type of business and your city's policies.
Home Occupation Permits
Home occupation permits are usually issued by the Planning (or Community Development) Department and are required before you obtain a business license. Business owners must agree to comply with the city's home occupation restrictions. These generally include:
Contact the Planning Department for a Complete List.
Sign permit
Many cities regulate the size, color, placement and number of signs you can display. This includes temporary signs and "sandwich boards" placed on the sidewalk. They may also require a building permit to install permanent signs. In general, home businesses cannot have business signs.
Other necessary permits
If you are making renovations or want to put a planter outside your door, chances are that you'll need a sign or building permit.
Fire inspections
Commercial buildings are inspected annually by the fire department. This service is generally free except for restaurants, bars, theaters, and other places of public assembly, which may be charged an annual fire permit.
Handling food
If you handle food in any way, you'll need a Health Permit. This is typically issued by the County Environmental Health Department.
Questions?
Please contact your local city or county.