Self-Employment Tax
As April 15th approaches, all workers have taxes on their Agenda. For those of us who are self-employed, that means we are subject to a self-employment tax.
Per an internet search on Google, here is the definition of the self-employment tax. The federal self-employment tax is a 15.3% tax - comprising 12.4% for Social Security and 2.9% for Medicare - paid by individuals working for themselves. It applies to net earnings of $400 or more, based on 92.35% of net profit, and is calculated using Schedule SE (Form 1040). This tax is in addition to income tax, covering both employer and employee portions of FICA (Federal Insurance Contributions Act).
Every business owner or sole proprietor should be aware of the self-employment tax. We recently had this explained to us by an accountant for our own purposes and a few of our clients that were asking about it. Business expenses reduce your net profit. This seems to be the best way to manage this tax, if at all possible. Therefore, we had to make sure all of our business expenses, particularly mileage and meals, were fully accounted for in our annual expenses. Mileage is set by the IRS each year so make sure you research the current year’s reimbursement rate for the tax year you are completing. We can all be guilty of not recording mileage to and from business meetings. It is quite easy to forget as you drive about for meetings.
Years ago, a practice that seemed to work for a colleague was keeping a mileage journal in his car. Each time he drive to a client’s, or a business meeting or event, he recorded the mileage and date and event before he exited the car for the day. It seemed to work quite well. While the rest of us searched through our calendar for business events and then coordinated mileage with a Maps App, he was all set. It may seem “old school” but several of us learned quickly that adopting that approach saved us time when it came to expense reimbursement. Whatever method works for you to remember to record the mileage reimbursement event and its associated distance, adopt what is easiest for you. Legitimate mileage expenses for business are easy to forget or under report so find a method that minimizes mistakes and does not rely so heavily upon your memory.
As you complete your taxes for 2025, ask your accountant about your specific self-employment tax amount. It is always good to be knowledgeable about financial requirements that impact your business.
Be well.
