More Self-Employment

I am always on the lookout for happy news about the economy, mostly because it’s relative scarcity makes it interesting.  (Can’t wait for boredom to set in.)  It was in the LA Times that I first read about the 36% increase in the number of self-employed people in the US.  One sure way to eliminate your unemployment problem is to start employing yourself. The consensus appears to be that the jump in this area of the economy is just that.  People are tired of looking for jobs that aren’t there, so they’re applying their skills on their own.   While this has many benefits,  it also carries many responsibilities that never came up in your life as a wage-slave. 

Just last week I had to explain to a friend that her newly self-employed husband would have to pay self-employment tax.  For the uninitiated this is the part of your FICA withholding that your employer pays.  If you can’t find an employer to pay it, your Uncle Sam expects you to take care of it.  The “Cliffs Notes” version (While I did insert a real link, I’m using the term metaphorically.  Would that there were a Cliffs Notes version of the Internal Revenue Code!)  is that the payroll taxes  used to pay for Medicare and Social Security Benefits are typically 15.3% of wages.  In a typical year, the employee pays half that amount and the employer pays the other half.  If you are both the employer and employee you pay the whole amount.  When you file your tax return for those wages, if you’re self employed, you get to deduct that “employer” half, so in a way you get it back.  There are income caps that impact the collection of the tax, and for this year only the employee amount is lower, but you get the drift without me going into more detail.

Not only do self-employed people need to pay this, but they need to also follow the example set by their previous employers of paying these taxes in a timely fashion.  For most people (again a lot of exceptions and income related caveats go along with this) that means paying a quarterly estimate of how much tax you think you’ll owe.  This does have the benefit of placing the former April 15^th related headaches in context.  Think of it as the difference between a tension headache and a migraine.  Actually, it’s probably more like the difference between a passing and a persistent headache.  To get into migraine territory we’re talking about multi-state commerce and retail goods subject to sales tax.  If either of those applies take two aspirin and call your accountant.  We can follow up on those topics here another day.