Tax time can be very stressful, especially when changes are made to tax laws and rates. For Minneapolis residents who are self-employed, however, tax season can be particularly chaotic. In addition to completing normal job-related tasks, it's also necessary to handle tax filings.
People who aren't self-employed have the benefit of having payroll taxes deducted from each check and their employer pick up half of that bill. On the other hand, those who employ themselves have to manage paying this tax, which accounts for Social Security and Medicare taxes. If this tax burden isn't correctly paid, it's likely to create issues with the Internal Revenue Service.
The self-employment tax imposes a 15.3 percent rate on the first $113,700 worth of income. Any earnings above that threshold are taxed almost 3 percent for Medicare. Additionally, there is a new 0.9 percent tax on Medicare for married couples earning over $250,000 and $200,000 for individuals. Put together, this can be considered a major burden and open the door for mistakes.
If someone accidentally fails to pay enough in self-employment taxes, they are likely to deal with a tax debt claim down the road, which could include tax penalties from the IRS. Additionally, a self-employed person may not have the resources in-house to deal with a tax dispute. Tax agents will certainly be ready to defend their claims, so it's important that individuals are prepared to worth through the issue.
Although the self-employment tax may seem like a major burden, it's worth noting that half of the tax may be deducted on IRS Form 1040.
Source: Market Watch, "Do you owe the self-employment tax?" Bill Bischoff, Aug. 20, 2013