Q: Is my federal income tax return – Form 1040 – used only to calculate federal income taxes?
A: No. Your federal tax return can also calculate other taxes, including Social Security and Medicare taxes for people who are self-employed.
With more people earning money through gig work, freelancing and small businesses, understanding self-employment tax is increasingly important.
Self-employment tax is separate from federal income tax. It covers Social Security and Medicare taxes on earnings from self-employment. For many self-employed taxpayers, this tax can actually represent the largest portion of their total federal tax liability.
Self-employed people pay both portions. When you work for an employer, you and your employer each pay a share of Social Security and Medicare taxes. When you work for yourself, you’re responsible for both shares.
The amount can be substantial. For many, the self-employment tax amounts to approximately 14 percent of net business earnings in addition to any regular federal income tax owed.
The bottom line: Your federal tax return isn’t just about income tax. If you’re self-employed, Social Security and Medicare taxes may actually account for most of your federal tax liability – even when you owe relatively little regular federal income tax. Understanding this obligation can help you avoid an unexpected tax bill.
Send questions about your taxes to Vincent Hicks, a CPA based in Cambridge who has more than 20 years of experience, at vincent@hickscpasolutions.com. You can call Hicks at (859) 553-0788.
