Let’s say a self employed person manages to scrape up $7000 in a year. They are then expected to pay back approximately 15% of it in taxes? Is this correct in that there is no sliding scale for self employment income? You would pay 15% if you make $90,000 and you pay 15% if you make $5000? The only exception seemed to be if you made under $400, which isn’t much of an exception.
Am I missing something?
Not missing anything, been there done that and it sucks. My take on it is that self employment is discouraged this way. They like cogs, not people.
And note that this self-employment tax must also be paid by ex-pats; it is NOT subject to the Foreign Earned Income Exclusion.
The theory is that this pays for Social Security and Medicare. Politicians all talk about Social Security being like a pension.
But note that it’s the exact same thing if you have regular W2 income. Your employer pays 7.5% of your paycheck to the IRS, and withholds another 7.5% of your paycheck, and there are no deductions or refunds. Social security/medicare taxes are paid straight across until you reach the cap, then you pay the same flat amount no matter how much you make.
The payroll tax comes in at practically the first dime of income. No exemptions, no refunds. If you are self-employed, you pay the employer and employee portions, currently 7.50% each. The reason politicians are always screaming to raise the minimum wage? Not for the poor stiffs making it. Brings up the take from the payroll tax.
There is not a sliding scale but you do get to deduct expenses. For instance, if you earn wages you can’t deduct your rent. If your small business is out of your home and you have a two-bedroom home and one of them is dedicated to your business, then you can figure out the approximate square footage of the total and deduct that from your self-employed income. If you earn wages you can’t deduct your mileage to and from work. If, as a self-employed person, you drive around in any way you can deduct mileage for your small business. Etc.
I am not a tax accountant, but this is how my tax accountant did it.
Nope, you aren’t missing a damn thing.
I speak from experience.
Now you know why I get so pissed off when someone crows “poor people don’t pay taxes!” The F we don’t.
What people don’t get about self-employment income is that it’s not after-tax money like what you get on a paycheck. If you are offered $10/hr as a employee and you work 700 hours, do you get a paycheck for $7000? No, of course not. Money has been withheld and paid on your behalf. Maybe you only got $6000 net.
Self-employed people need to understand that $7000 of self-employment is not like a paycheck for $7000 net. It’s like the $400 of gross wages. So $7000 of self-employment is only a net pay of $6000.
Because they are self-employed, they are responsible for sending it in themselves. If you spend the government’s money, you don’t have much grounds for complaining when they want it back.
Self Employment tax is in lieu of Social Security tax and Medicare tax. If you are employed by someone else, they take 7.65% out of your paycheck and they also have to kick in another 7.65% on top of that which you never saw. If you are self employed, then you have to pay the entire 15.3% yourself because you’re both the employer and the employee.
Let’s suppose you earned $7,000 mowing lawns for the summer, working for yourself. That money isn’t all profit; you had expenses. So you figure how much you spent on things like fuel, advertising, travel to and from jobs, repairs on your mower, et cetera and it comes to $621. So your net profit is $6,379. You don’t pay SE tax on the expenses, just on the profit.
SE tax is calculated this way: multiply your net profit times 92.35% and then take that result and multiply it by 15.3%. So 6379.00*92.35% is $5,891.01 and then we figure 15.3% of $5,891.01 which is $901.32. The part you get to keep is $5,477.68
This is exactly the same amount of tax that Uncle Sam would have taken if you’d gotten a summer job where your boss promised to pay you $5,891.01. You would see a pay stub that says your wages are $5,891.01 and your employer took out $365.24 for Social Security and $85.42 for Medicare, total deductions $450.66, and the part you get to keep is $5,477.68.
But what you don’t see is that your boss also had to kick in another $450.66 and send it to Uncle Sam, so really the total that your boss paid you plus Uncle Sam together comes to $6,379 and Uncle Sam’s portion comes to $901.32. It’s exactly the same.
And yes, you are right that it doesn’t matter that whether you’re below the poverty line or not. In that way, Social Security tax and Medicare tax are like sales tax.
The only exceptions I know are that 1) if you make less than $400 then you don’t have to fill out the forms or pay the tax at all (which is great news for all those kids out there with lemonade stands), and 2) if you make more than $117,000 (either as a salary or being self-employed) then you don’t have to pay Social Security tax on the portion which is above $117,000.
Uh, isn’t capital gains…like if you sell a company to someone else for millions of dollars…taxed at only 15% and it is not subject to the self-employment tax? So when Warren Buffet points out he pays less taxes as a percentage of income than his secretary, this is not because he’s using some crazy tax loopholes?
Long-term capital gains are 0% for people in the lowest two tax brackets, 15% for people in the middle brackets, and 20% for the highest bracket. Short-term capital gains (less than one year) are taxed at the normal income rate.
I’m sure the vast majority of Buffet’s income is long-term capital gains, which would be taxed at the 20% rate. Which is indeed significantly lower than the highest rate for wage income.
I wonder how many people in the 10-15% tax brackets actually have capital gains to report.
More than you might think. A lot of them are retirees.
Most of the people I have done tax returns for as a VITA volunteer had capital gains and were in the 15% tax bracket.
Yes, you are. You were supposed to pay quarterly taxes. Since you waited until the end of the year, you owe Uncle Sam 15% of your $7,000 plus tax penalties for not paying quarterly. Welcome to small business ownership.
There is the Earned Income Tax Credit:
Um… and your point is what?
If you’re self-employed you pay self-employment tax regardless of what else you may or may not qualify to get. You still have to pay it quarterly, as pointed out, so you’re still writing a check for 15% of your income for the quarter and mailing it off. Saying “oh, you’ll get X later on” isn’t going to help you pay the rent in the meanwhile.
No. That is not correct.
First, EIC is a refundable credit. So it will reduce your SE tax.
Second, estimated tax payments are based on your total tax picture for the year, not just on self-employment. So if you expect to owe, for example, $1000 in self-employment and income taxes, but expect to receive $500 in EIC credits, you do not have to pay $250 each quarter. $125 will do quite nicely.
Third, you do not have to make federal estimated tax payment if your total tax (self-employment plus income tax) minus withholding and credits is less than $1000. (State income tax thresholds may vary.)
Fourth, if you did not owe any taxes last year, you do not have to make estimated tax payments this year. If you owed taxes last year, your estimated tax payments do not have to be more than your previous year’s taxes (110% of your previous year’s taxes if your previous AGI was over $150,000).
Fifth, you don’t have to pay more than 90% of this year’s taxes as estimated payments (and frequently less).
Sixth, since Advanced EIC payments were eliminated, non-self-employed workers have to have Social Security taxes taken out of their pay and wait until next year to get their EIC payment.
Finally, estimated taxes are not some special thing just for self-employed people. They are a part of the bigger picture and may be required for anyone who does not pay sufficient tax via withholding.
Seventh, the professional account I hired is the person I take tax payment and reporting advice from, not random strangers on the internet.
Rather than bog down a thread with the intricacies of my tax picture over the past 20 years I went with the rather simple “I have to make quarterly payments even if my income is below the poverty line” because that has been the case more often than not since I got laid off from the cushy corporate job. The fact that this IS complicated is the primary reason I seek professional tax advice because guessing wrong as an amateur can result in substantial penalties far in excess of an accountant’s fees for helping you do this correctly the first time around.
Frankly, the EITC for a childless couple (my situation) isn’t that much. The people who benefit most from that are those with kids.
The OP’s question was “do self-employed poor people still have to pay self-employment tax?” The answer is “yes”.
Great! I encourage you to do that because the information you post on the internet about estimated taxes is not correct.