Being Self-Employed is Great, but not at Tax Time!

All my friends are envious that I work mostly at home, on my own schedule. Of course, they don’t realize that being an independent contractor means that I work a whole lot more hours than most folks who receive a regular paycheck, and at all times of the day and night!

Being self-employed is not for the faint at heart! But it has many rewards, including flexibility, being your own boss, and knowing that the amount of effort you expend is directly related to your results.

However, when Uncle Sam comes ‘round every few months—with his hand out—I grit my teeth and just write out the inevitable check. Listen, I don’t mind paying my fair share, but the Self-Employment Tax pushes my goodwill to the limit.

And…it requires additional tax planning that many new independent contractors don’t understand.

You see, when someone else writes your paycheck, they also pay one-half your Self-Employment Tax, which is essentially Social Security and Medicare taxes. But when you are your employer, you have to pay it all! And for 2011, that means your nut is 13.3% of the first $106,800 of your self-employment income (10.4% for Social Security and 2.9% for Medicare). That is actually better than 2010, thanks to the 2010 Tax Relief Act that reduced the self-employment tax by 2% for 2011.

On the plus side, Uncle Sam also allows you to deduct one-half of your self-employment tax when calculating your adjusted gross income. Note thought, that the deduction only applies to your income tax—not to your net earnings from self-employment or your self-employment tax.

So, the next time your friends tell you how easy you have it being self-employed (and don’t forget how rich, either!), share this little story—maybe they’ll buy your dinner!