Employees enjoy the benefits of tax withholdings, yet, they have to file their taxes during the tax season. They may owe the IRS or receive a refund from them, depending on the deductions they enjoy. The same rules apply to those who are self-employed. The IRS data for self-employment tax filers in 2017 shows a considerable increase in the growth of independent contractors and freelancers with statistics doubling the previous year in the US.
Self-employed individuals in California must of necessity set aside their withholdings and pay their California self-employment tax, and for compliance's sake, it is essential to follow an outlined schedule of payment. Paying taxes can be a burden if the individual taxpayer does not understand the process. Social security and Medicare are the main components of California self-employment tax, according to the California FTB- Franchise Tax Board.
The self-employment tax in California applies to residents whose profit earning is at least $400 during the tax year. This includes residents of Limited Liability Company that are structured as partnerships or are part of alliances. According to California IRS, businesses run by independent contractors or sole proprietors are examples of self-employment. The California self-employment tax is to be paid by the following people:
A self-employed individual is with $400 net earnings is expected to pay California self-employment tax. It means after deducting your expenses from your income, if your profit is $400 or more, then you owe the state of California, self-employment tax. Unlike employees who collect paychecks every month with their taxes deducted, self-employed individuals must pay their taxes quarterly. Once independent contractors in California estimate their California self-employment tax, they will want to know the quarterly schedule. Specific to California, the IRS and FTB follow the same schedule.
Independent contractors can pay 25% of their annual estimated tax each quarter. This annual estimated tax keeps on changing, as some years get busier than others, it reflects in tax rates as well. Check out the IRS Publication 505 to get details on the withholdings and estimated taxes. The forms used for filing taxes are Form 1040-ES (IRS) and Form 540-ES (FTB). The schedule C form is used to report their income.
Residents of California have a few options to send in their payments for those who are ready. To pay your California self-employment tax, use the free California portal link or print out the needed forms and send them to the appropriate quarters (IRS and FTB).
Currently, the self-employment tax rate in California is 15.3%; 12.4% of that percentage goes to Social Security. This is collectible up to $118,500, and the remaining 2.9% is for Medicare without any limit to collectible earnings.
Self-employed individuals can enjoy deductions from their adjusted gross income. These deductions are only for income taxes. You can enjoy tax deduction from costs incurred on mileage, office space, equipment, and other expenses that deal with the business.
Willful tax evasion is an offense that attracts penalties. There are penalties involved for both full-time employees and independent contractors. The worst that could happen is an issuance of a tax lien to the offender. The fine starts from 5% of the total tax due for that date, and for the subsequent month of partial or non-payment, there is an additional charge of 5%. The maximum penalty can be up to 25%.