One of the most common questions we get from our self-employed clients appears so simple on the surface, but is actually one of the more complex questions a taxpayer can ask: How much do I need to set aside for taxes?
Most clients assume a percentage so that they can estimate how much of their gross revenue they should plan on saving for when they file their taxes, not considering that their situation can be unique and have many different complications.
There are 2 main taxes that a self-employed taxpayer needs to consider: income tax and self-employment tax. Income tax is the traditional tax that is due on a taxpayer’s income based on how much they earn, their deductions, and filing status. Self-employment tax is the contributions that are due to Social Security and Medicare (FICA) – since the taxpayer is self-employed they are responsible for both the employer and employee portion of FICA taxes, but they get a deduction similar to an employer for the employer portion paid as a business expense.
Self-employed taxpayers also need to be aware of the rules regarding the timing of tax payments. The current laws in place require taxpayers to pay estimated taxes quarterly in April, June, September and January of the following year for each taxable year. The size of your estimates will typically be based on either 110% of the prior year taxes, or 90% of the current year tax. Failure to make these payments may result in the taxpayer being assessed interest and penalties.
The tables below should help a self-employed taxpayer determine approximately how much they will need to save to cover their annual tax liability.
Gross Income From Business | ||||||
Less: Business Expenses | ||||||
Business Income | ||||||
Less: SE deduction (7.65% of Business Income) | ||||||
Taxable Income | ||||||
SINGLE | ||||||
Taxable Income | Income Tax Rate | SE Rate | Combined Rate | |||
$ – | $ 9,075 | 10.00% | 15.30% | 25.30% | ||
$ 9,075 | $ 36,900 | 15.00% | 15.30% | 30.30% | ||
$ 36,900 | $ 89,350 | 25.00% | 15.30% | 40.30% | ||
$ 89,350 | $ 186,350 | 28.00% | 14.91% | 42.91% | ||
$ 186,350 | $ 405,100 | 33.00% | 8.58% | 41.58% | ||
$ 405,100 | $ 406,750 | 35.00% | 6.47% | 41.47% | ||
$ 406,750 | Over | 39.60% | 5.41% | 45.01% | ||
MARRIED | ||||||
Taxable Income | Income Tax Rate | SE Rate | Combined Rate | |||
$ – | $ 18,150 | 10.00% | 15.30% | 25.30% | ||
$ 18,150 | $ 73,800 | 15.00% | 15.30% | 30.30% | ||
$ 73,800 | $ 148,850 | 25.00% | 15.30% | 40.30% | ||
$ 148,850 | $ 226,850 | 28.00% | 11.00% | 39.00% | ||
$ 226,850 | $ 405,100 | 33.00% | 7.89% | 40.89% | ||
$ 405,100 | $ 457,600 | 35.00% | 6.28% | 41.28% | ||
$ 457,600 | Over | 39.60% | 5.21% | 44.81% |
As shown above, the rate can be as low as 25.3% up to 45.01%, depending on the size of the profit. Also to take into consideration is Social Security tax maximum of 12.4% of the self-employment piece at $117,000 for 2014 and $118,500 for 2015. The above rates were adjusted to give an approximation of this effect. The average rate is about 37.77%, which should be a conservative benchmark for self-employed taxpayers to follow.
Edward McWilliams, CPA
Partner
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.