updated September 6, 2023 · 3min read
Self-employment offers many freedoms and opportunities. But you may be surprised to discover that your tax bill will be much higher when you work for yourself. Self-employed people must pay self-employment taxes, which can come as a shock to your budget. You may be able to reduce the amount of tax you pay by setting up a limited liability company (LLC) or a corporation.
When you are an employee, you pay part of your Social Security and Medicare taxes and your employer pays the other part. When you're self-employed, the same total amount is owed for Social Security and Medicare, but you're required to pay all of it yourself, in addition to your regular income taxes. This is called the self-employment tax. Self-employment tax applies to sole proprietors, members of a partnership, and members of a disregarded LLC (a one-member LLC that chooses to be taxed as an individual).
For the 2020 tax year, self-employed people pay 12.4% of their income toward Social Security and 2.9% of their income toward Medicare, for a total of 15.3% in self-employment taxes. This applies only to the first $137,700 of income (in 2021 that amount will increase to $142,800). You'll pay an additional Medicare tax of 0.9% on any income in excess of $200,000. Self-employment tax must be paid quarterly.
If you set up an LLC, you have some options when it comes to LLC self-employment taxes:
If you form a corporation, you can incorporate as a C-Corporation or as an S-Corporation.
Choosing to set up your business as an LLC or corporation can reduce the amount of self-employment taxes you will have to pay.
by Brette Sember, J.D.
Brette Sember, J.D., practiced law in New York, including divorce, mediation, family law, adoption, probate and estat...
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