Understanding The Self Employment Tax

You’ve done it, followed your dream and started your own business, and now reality hits. Income tax time is approaching and it’s time to calculate your taxes.

You need to learn all you can about taxes, just as you learned all you could about your business.

Self employment tax applies to everyone who is self employed and made more than (let’s hope so) $400 a year. It doesn’t matter how old you are, even old enough to collect social security, the federal government wants their part of your income.

When you are employed, your employer shares the tax burden with you, they pay 7.65% of your income and so do you. When you are self employed you get to pay the whole thing, 15.3%. 12.4% goes to pay Social Security and 2.9% for Medicare. But this only applies up to income of $94,200. Above that you only pay the 2.9% for Medicare.

When you are self employed, it is your responsibility to pay quarterly estimated tax payments. If you were employed your employer would do this for you, but since you get to be your own boss, you have to deal with this. Quarterly estimated taxes are due in April, June, Sept. and Jan. If you do not pay them you could be subject to underpayment penalties.

I would recommend that you get the big picture regarding your tax liability. You will need to plan ahead. Take advantage of a free online income tax calculator and estimate your quarterly self employment tax, and calculate your estimated income tax as well. Know ahead what is expected of you. Isn’t your business worth it?


Like It or Not, Legal Tax Avoidance Is Here to Stay

Tax has historically always been a controversial subject. Who pays taxes and how much they pay often being a sore or sensitive point. And when you hear about tax avoidance, it can immediately provoke a hostile reaction, with people immediately, and often erroneously, assuming some law has been broken.

That tends to be the common reaction, and in the UK, a number of high profile figures have been pilloried in the press for their tax avoidance. But under scrutiny, most such individuals may be the recipients of moral outrage but rarely legal retribution.

The reason being is that they are taking advantage of perfectly legal tax avoidance schemes. One of the most common schemes utilised by high earning individuals revolves around remuneration trusts. In the UK, they represent perfectly legal tax mitigation schemes.

They operate by allowing an individual or company to use an offshore company to invoice for their services rather than paying them directly, which, unsurprisingly, provides a whole host of tax benefits. The offshore company can then, without breaking any UK tax law, transfer these funds to a UK company to invest on its behalf. Because the money is held on trust for the offshore company, there is no tax payable on the UK company’s investment or the profits it then accrues from the investment. Additionally, the offshore company can pay loans to private individuals who receive these loans tax free.

Naturally, remuneration trusts prove one of the more robust and legal tax avoidance strategies, but they are only accessible to high earners, usually companies, shareholders and individuals earning in excess of £100.p.a. Such schemes have been accepted by HMRC in the UK since 1994, and have been scrutinised by legal opinion too. As such, they remain perfectly legal, and serve as an important distinction when talking about tax avoidance.

Anyone who evades taxes they should be paying is subject to the rule of law, and can be rightly persecuted. However, when an individual undertakes perfectly legal tax planning strategies, the question is one of morality rather than legality. And, whether an individual should be allowed to legally avoid taxes by such strategies is also a political question.

Currently in the UK, there are numerous tax mitigation schemes which can legally help high earners, but changes in government could in the future render such strategies illegal based on a view that high earners should not be able to avail themselves of tax planning strategies unavailable to all.

But, for now, they are accessible to high earners and it pays dividends when hearing about high profile individuals engaged in tax avoidance to read between the lines and ascertain whether they are engaged in illegal activities or merely taking advantage of the numerous legal tax schemes such as remuneration trusts which provide them with substantial tax benefits on their earned income.