The IRS levies a self-employment tax on your income if you are self-employed. The self-employment tax composes of social security and Medicare tax deduction. Because you are the employer, you calculate the self-employment tax yourself. According to IRS regulations, you can deduct half of the self-employment tax when calculating your adjusted gross income. This deduction impacts your income tax only, not your net earnings.
The self-employment tax set by the IRS for 2010 is 15.3 percent on your income up to $106,800. This rate has two components: 12.4 percent allocates to social security tax provisions for senior citizens and disability insurance and is only payable on the first $106,800 of your income. The remaining 2.9 percent of the self-employment tax is for Medicare taxes for social services such as hospital insurance and is payable on your entire net earnings.
To pay the self-employment tax, you must obtain a social security number or an individual taxpayer identification number. The IRS states that if your tax year is different from your “calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning” of the tax year for tax calculations. Ignore changes in specifics during the tax year and apply the calculations you used for the beginning of the year throughout the year.
Considerations for Caregivers
The IRS has special regulations for caretakers of elderly or disabled people. For IRS purposes, caregivers are employees of persons receiving care and the care receiver is hence the employer. If you provide caregiver services to a family member, that family member, your employer, may not subject the income she pays you to employment taxes. Note that the income you receive in this capacity must still be reported to the IRS.
The self-employment tax is applicable on all individuals who fit the IRS’ self-employed profile. Self-employment tax regulation applies to you regardless of your age and existing social security or Medicare deductions. The IRS levies the Self-employment tax on self-employed net earnings that exceed $400 or income that exceeds $108.28 for church employees. If income tax is not withheld for you, you must make estimated tax payments for when filing returns to avoid penalties.