Individuals that don't have a formal employer but instead work for themselves have to pay self employment taxes. These can be confusing to the newly self-employed, whether as a freelance writer or photographer, after having just started some new business, or as a new retailer without a brick and mortar storefront. There are a number of different taxes for the self employed, from the basics that every person working for his or herself has to pay to things like the 1099-K, which are only necessary for those that accept credit card payments. It's worth taking the time to understand what these extra taxes cover and why they are important.
The first time a freelancer gets ready to prepare a tax filing, he or she may become frustrated with how expensive self employment taxes are. The IRS website says that the term generally applies to the tax necessary to cover Social Security and Medicare, and is very similar in amount to the deductions made from income by the employer for people employed by another company. This is separate from income tax, which self-employed must also pay. But employers pay a portion of a person's Medicare and Social Security tax that they don't deduct from income. In other words, this tax falls disproportionately on the self-employed compared to those working for a company and receiving a paycheck.
The internet has made it easier to have a store and promoting low-cost ways to sell things online. The IRS and Federal Government responded in 2008 with the 1099-K, which has been a requirement since 2011 for any business that sells more than $20,000 in goods and services and has at least 200 payments with one payment processor during the calendar year. Online payment processors and retailers like Ebay and Amazon send this form to small businesses, who then file it as part of their tax return. It is part of the IRS' effort to understand where these small sums that add up to a lot of money are going.
Corporate taxes cover a number of different things that are hard to pin down, while self-employment taxes go directly to government retirement and welfare funds that should, supposedly, support those same people when they get older. Despite the importance of tax revenue for the government to continue doing its job, all these various new taxes that a person will face upon becoming self employed do make the move not only more complicated, but somewhat less profitable than may have been expected.
The first time a freelancer gets ready to prepare a tax filing, he or she may become frustrated with how expensive self employment taxes are. The IRS website says that the term generally applies to the tax necessary to cover Social Security and Medicare, and is very similar in amount to the deductions made from income by the employer for people employed by another company. This is separate from income tax, which self-employed must also pay. But employers pay a portion of a person's Medicare and Social Security tax that they don't deduct from income. In other words, this tax falls disproportionately on the self-employed compared to those working for a company and receiving a paycheck.
The internet has made it easier to have a store and promoting low-cost ways to sell things online. The IRS and Federal Government responded in 2008 with the 1099-K, which has been a requirement since 2011 for any business that sells more than $20,000 in goods and services and has at least 200 payments with one payment processor during the calendar year. Online payment processors and retailers like Ebay and Amazon send this form to small businesses, who then file it as part of their tax return. It is part of the IRS' effort to understand where these small sums that add up to a lot of money are going.
Corporate taxes cover a number of different things that are hard to pin down, while self-employment taxes go directly to government retirement and welfare funds that should, supposedly, support those same people when they get older. Despite the importance of tax revenue for the government to continue doing its job, all these various new taxes that a person will face upon becoming self employed do make the move not only more complicated, but somewhat less profitable than may have been expected.
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