UPDATED WITH LINKS TO 2012 IRS FORMS
Nobody likes self-employment tax, I know, but as our authorial success grows, there's a chance that we’ll make a profit for tax purposes. At that point, we’ll need at least a passing knowledge of self-employment tax. Come on, anybody who can write a WHOLE BOOK and then market the thing to make a profit can figure a little self-employment tax!
Now for the disclaimer: As a reminder, everything you need to know about personal and business tax reporting is available on the IRS website (www.irs.gov). My advice is not intended to replace that of your accountant; I hope simply to help you prepare for your annual tax filing.
I thought about mentioning this in the post on IRS forms, but really, the self-employment tax is so special that it deserves a post of its own…
Before you get in a huff about this, read on:
If you have a ‘regular’ job – the kind where you get a paycheck every now and then – you already pay the employee portion of Social Security and Medicare taxes. Check a pay stub. It’ll show amounts withheld for Social Security and Medicare – see? That’s the part that you pay. What you can’t see is the portion that your employer pays on your behalf.
Okay, you’re still huffy and reaching for that pitchfork or torch. Why are you, struggling artist, forced to pay twice the Social Security and Medicare taxes that a ‘regularly’ employed person would pay? Never fear, the IRS comes through with a save on this one. After you calculate your self-employment tax, you get to take a deduction for the employer’s portion of the self-employment tax.
The IRS taketh away, then it giveth back.
And it works like this:
You’ve just completed your Schedule C – inputting income, calculating Cost of Goods Sold, and including your expenses – and you do the math to get to the figure on Line 31 to find out whether you’ve made a profit or loss for the tax year. You carry that figure to Line 12 on your Form1040.
Good. You’re done with Schedule C.
And then one of two things happen with regards to self-employment tax:
- If you show a PROFIT on Schedule C, Line 31 (congratulations!) – you’ll complete Schedule SE – Self-Employment Tax. Put your profit figure from ScheduleC, Line 31 on Line 2 of Schedule SE and complete the calculations on the form. Input the figure from Line 5 on Line 56 of your Form 1040, and the figure from Line 6 on Line 27 of your Form 1040.
- If you show a LOSS on Schedule C, Line 31, you probably will not complete Schedule SE. However, you should read the criteria on Lines 1a and 1b of Schedule SE to determine if you do not have to file Schedule SE. (The point of the exercise is to net all sources of self-employment income to determine whether you have to pay self-employment tax. For example, if you had a bakery and a writing business, you would net the income or loss from each. If you had net income from both businesses, then you would complete the Schedule SE – a net loss, no Schedule SE.)
And that's all there is to self-employment tax. Not so bad, was it? Go have a cupcake. You can pick up your pitchforks and torches at the back of the room...
Be sure to check out other relevant posts:
- sorting out your income,
- everybody's favorite topic expenses, and
- navigating the dark waters of IRS forms.