Question by Jason L: How does self-employment tax work for Sole Proprietorship?
What happens if you make $ 20,000 through your full time job, and $ 0 through self employment? Do you pay $ 0 for the self employment tax as a self proprietor? Or, do you still have to pay using $ 20,000 as the total income? Please help me someone. Thanks.

Best answer:

Answer by Beckee
It’s like this. If you are employed in such a way that social security and income taxes are withheld from your paycheck, you pay half the social security taxes out of your paycheck, and your employer pays another half of your social security taxes.

Social security is a regressive tax, by the way. It only comes out of income from working, not interest or dividends or anything like that. And once you have made and paid 7.65% social security taxes on $ 102,000 of your wages, salaries, and tips in 2008, you only have to pay the medicare tax (1.45%) for the rest of the year. So the poor actually pay a larger percentage of their income in social security taxes than the rich do, even though the poor are probably more likely to die before they retire.

If you are self-employed, you are both employer and employee. This means you pay both halves of the social security tax (15.3%) on the money you make from self-employment.

If I remember correctly, you pay that tax on your profit, not on your revenue, so you do get to deduct business expenses before you calculate your self-employment tax. In your example, that would mean that your self-employment tax would be zero, and your social security contribution for the year would come from your job.

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One Response to “Q&A: How does self-employment tax work for Sole Proprietorship?”

  1. heart_and_troll says:

    Here’s the simple answer, without all the politics:

    Yes, yes, no.

    You only pay self employment tax on net self-employment income over a certain threshold (I believe the first $ 400 or 600 or so is SE-tax free).

    See IRS Form SE and instructions for more information.

    PS: The top 5% of income earners pay 50% of all income taxes, and the top 50% pay 95% of all income taxes in the U.S.