Self-Employment Tax Information for 2011-12

By Michael Francis

Individuals who go into business for themselves must consider tax expenses as part of their accounting system. Self-employed individuals must account for the government taxes that will come out of their income. And failing to file for these tax liabilities can result in serious penalties.

When working for an employer, the employee usually pays one-half of the employment taxes while the employer pays the other half. But as a self-employed individual, you are responsible for paying all portions of the employment tax to the government. These payments are due throughout the year, based on the level of income your business generates.

There are several components of the self-employment tax for 2011-12. The two main portions are for Social Security (also known as OASDI) and Medicare/Medicaid. In order to compute the amount of self-employment tax you owe, you must know your total annual income. This will also tell you if you need to pay these taxes more frequently in the future.

The OASDI (short for Old Age, Survivors, and Disability Insurance) self-employment tax for 2011-2012 is equivalent to 10.4% of your income. People who work for other employers pay a 4.2% tax, while the employer pays the other 6.2%. Prior to 2011, the tax was set at 6.2% for both workers and their employers. These tax rates apply to the first $110,100 you generate from your self-employment endeavors in a given year. You don’t have to pay any social security taxes on earnings that exceed this income threshold.  

The Medicare portion of the self-employment tax for 2010-2011 is equal to 2.9% of your income. Like the OASDI tax, this rate is split between employee and employer for those who aren’t in business for themselves. The worker and employer are each responsible for paying 1.45% of applicable wages towards the Medicare entitlement program. Self-employed individuals are, again, responsible for both components of this tax. Unlike the OASDI tax, however, there is no ceiling on the amount of income to be taxed. In other words, no matter how much you earn, the government demands 2.9% of it.

Finally, the amount of self-employment income and tax may determine the required frequency of your tax payments. If your self-employment income is greater than $400, you are required to state the amount on your annual tax return and note the total income and expenses associated with your business and work activities. Individuals should file Schedule C, Profit/Loss from Business, to account for these business activities.

To determine if you need to pay estimated self-employment taxes in the future, use worksheet 1040-ES and Schedule SE from the IRS. If your self-employed income taxes for the year are estimated to be greater than $1,000, you will need to make quarterly tax payments to the IRS. You would need to set up an account using your Social Security Number or Taxpayer Identification Number to transmit payments for taxes due to the IRS in January, April, July, and October. If the tax due for the year is below $1,000, you will be able to include the amount due in your annual tax return payment and will not have to worry about quarterly payments.