Monday, April 10, 2006

The long awaited post on self-employment tax


I recently promised a post on the self-employment tax form, which I forgot to mention in my tax tips post some time back. Since you last-minuters have only a week left, I thought I should post on this today.

The form is the 1040 Schedule SE, and should have been included in my "Forms you will need" list. The self-employment tax is about 15% of your net earnings - that is, your income after all of your expenses have been deducted. I forgot to include it in my post because after all of my deductions (mainly my laptop), I netted less than $400 last year, in which case you don't have to pay a self-employment tax or file the form.

I was reminded of the form because I started investigating the estimated tax prepayments, which self-employed people are also required to do. Speaking of that, I will post on that particular subject very soon, as well, as the first quarter's estimated taxes are due on tax day, as well.

Self-employment tax infuriates me, especially as it is so high. I think I remember reading somewhere that it is meant to replace a tax that businesses pay - i.e. if you're not employed by a business, the IRS would otherwise lose money because of your self-employment. However, it hardly seems fair to penalize us for having the gumption to make a go of it on our own, with a tax that wouldn't ordinarily come out of our pockets. When you consider that the self-employment tax is 15% on top of the normal tax rate, I can understand why there are so many books on how to increase your expenses and reduce your net income!

Although I didn't have to worry about that tax for last year, I will definitely have to pay it this year, and I don't expect it to be a pretty sight.

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