Four Strategies for Managing the Self-Employment Tax
When you’re working as a sole proprietor, you are both the employer and the employee. While it’s a business model that can offer you the benefits of flexibility and control, there are also important self-employment tax implications.
Consider, for example, that all workers must pay into Social Security and Medicare. For typical workers, this means they split that cost with their employers, each paying 7.65% of the employee’s eligible wages. Sole proprietors don’t have the benefit of splitting the cost with an employer, meaning they must pay both halves – 15.3% of earned income. This is referred to as the self-employment tax, and there’s quite a bit you should know about it – both to follow the letter of the law, and to minimize your tax burden as a sole proprietor.