You went self employed. You made good money your first year. You set aside money for taxes. You thought you were prepared. Then April comes and the bill is twice what you expected. Your first reaction is panic. Your second is anger. Nobody told you about this.
When you worked a regular job, your employer paid half of your Social Security and Medicare taxes. You only saw your half come out of your paycheck. The other half existed but you never had to think about it.
The moment you became self employed, you became both the employer and the employee. Which means you owe both halves now. That is what the 15.3 percent self employment tax is. It is not a punishment. It is the same Social Security and Medicare contribution every working person makes. You just see it now because nobody is splitting it with you.
12.4 percent Social Security and 2.9 percent Medicare. It applies to the first portion of your net business income up to a wage base limit, then drops slightly above that.
That is on top of regular federal income tax which depending on your bracket adds another 10 to 24 percent. So your first year self employed you could be looking at 25 to 40 percent of your net income going to taxes.
You can deduct half of your self employment tax on your federal income tax return. So that 15.3 percent feels closer to 11 to 12 percent in real terms.
When April arrives you will not be panicking. You will have the money already set aside.
Toozi reminds you to set aside the right amount every time you log income. No surprise tax bills. No April panic.
Toozi sets aside the right amount automatically.
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