How to File Taxes as a Virtual Paraplanner
Virtual paraplanners often work on a contract basis with a financial planning firm. What does this mean as far as your taxes go? How is your Self Employment tax calculated? Where do you report your Self Employment tax?
Self Employment Tax
Self Employment Tax refers to mandatory contributions that all self-employed individuals must make to Social Security and Medicare. It’s basically the same thing as the paycheck withholding you tend to see. However, when you’re getting a paycheck, your employer is paying for half of your contributions to Social Security and Medicare. When you work for yourself, you have to pay the full amount. If you earn more than $400 in business income, then you need to pay Self Employment tax.
How much is the Self Employment Tax?
The total Self Employment tax rate is 15.3%. Of that, 12.4% is for Social Security and 2.9% is for Medicare contributions. When figuring your adjusted gross income on Form 1040, you can deduct one-half of the self-employment tax on line 27 of Form 1040. If you had two or more businesses subject to self-employment tax, your net earnings from self-employment are the combined net earnings from all of your businesses. If you had a loss in one business, it reduces the income from another. Figure the combined SE tax on one Schedule SE. Don’t include salaries, fees, and other W-2 income subject to Social Security or Medicare tax that you received for performing services as an employee in calculating your earnings from Self Employment.
Is this the only tax I pay as self-employed?
In addition to the Self Employment tax, you also need to pay income taxes on any profit you earn from your business. If you expect to owe more than $1,000 in self employment and income taxes combined, then you need to make quarterly estimated tax payments.
How do I report and pay the Self Employment Tax?
Compute Self Employment tax on IRS Form 1040, Schedule SE (PDF). The Social Security Administration uses the information from Schedule SE to compute your benefits under the social security program.