Still uncertain about Self-Employment Tax? Author and CPA Christina Mercer explains.
Welcome back, Christina!
The topic of Business Taxes is not the most exciting one to explore, but I think we can all agree it’s an important one. And if you’re paying taxes, well then it means your business is making money, which is pretty exciting, right?
There are a variety of Business Taxes imposed on the self-employed (self-employed authors in our cases). The most well-known tax is, of course, Income Tax (Federal, and also for many, State). Income Taxes are configured using a whole slew of items, including but not limited to business earnings. If you have plenty of eligible “personal” deductions taken on your tax filing, Income Taxes generated by your business profits (and all taxable income) will be reduced—a goal many of us strive for come tax time.
However, there’s an important tax to understand that is imposed solely on business earnings, with its amount unchanged by any of those helpful personal deductions. Allow me to introduce to you the often misunderstood Self-Employment Tax.
Self-Employment Tax is actually the equivalent of Social Security and Medicare Tax that individuals normally have withheld from paychecks as EmployEEs added to the matching amount typically paid in by their pertaining EmployERs, all of which becomes the total responsibility of self-employed business owners to pay in themselves.
The rules on this state that once business Net Earnings (bus. income less bus. deductions) reach $400 or more, those earnings are taxed at a current rate of 15.3% (both the employee and employer portions combined) to arrive at Self-Employment Tax.
Not a small number . . . And what is important to note is that even if you’ve managed to shrink your Income Tax through applying various personal deductions, your Self-Employment Tax will still be owed in all its bulging glory. One consolation is that half of the Self-Employment Tax amount can be taken as a general tax deduction when figuring Income Taxes, which is definitely nice. But this still does not change the fact that the total Self-Employment Tax is due regardless of what Income Tax ends up at.
And speaking of taxes due . . .
When your total taxes (Income and Self-Employment) create a year-end tax liability (the amount due with a Federal tax return) of $1,000 or more, you are required to pay in what are known as Estimated Taxes.
(Note: states have their own rules and thresholds for determining state estimated taxes).
Estimated Taxes are (typically) figured using either the prior year’s tax liability of $1,000 or more OR the estimated tax liability for the current year of $1,000 or more. Estimated Taxes are (typically) spread out into four equal payments due the 15th of April, June, September, and January.
And, YES, today is one of those deadlines!
Ignoring the rules will likely generate unwanted tax penalties, so do be vigilant about getting those estimates paid in. Especially when considering that it doesn’t take a whole lot for Income Tax and Self Employment Tax combined to add up to that $1,000 annual tax liability threshold.
Still with me? Yeah, I know, taxes are super fun!
Okay, our next business tax may or may not pertain to you/your business, but it does apply to many authors. The collection and reporting of Sales Tax is required in most states by those directly selling goods. So, for authors purchasing books from publishers/distributors who are then turning around and re-selling them directly to readers—at book faires, signings, through author web sites, etc.—they would need to look to the state(s) where they do business for the rules and rates on Sales Tax collection/reporting.
Oh, and if authors are purchasing wholesale books and then keeping any for personal use or giving any away for Free (instead of re-selling them), they may need to pay tax on those freebies in the form of Use Tax. Use Tax is basically the Sales Tax they would’ve paid on the items if they hadn’t purchased them wholesale.
Okay, there are two other Business Taxes which also may or may not pertain to everyone, but they are still worth mentioning:
- If you hire employees, such as personal assistants (luckeee!), then you’ll have to collect/report/pay all pertinent Payroll Taxes.
- Business Personal Property Tax is a tax (typically a small one) levied by many counties. This tax is figured based on the current value of property/assets owned by a business (such as computers, furniture, etc.). If you have a business license or rent a commercial site, you will likely be contacted by your county to report on this one.
And that’s Business Taxes in Brief. Not too painful, I hope! I love hearing from you and helping my fellow creatives.
Question: If you had to pinpoint one tax item that utterly perplexes you as an author, please leave it in the comments below.
Annnd, if you’re hungry for more left-brained fun (and much more useful tax and accounting info.), I encourage to check out my friendly guide for writers just released this year: Bean-Counting for Authors-Helping Writers & Creative Business Owners Grasp Accounting & Taxes
Maybe you’d also like a sweet (with a little sting) YA Romance: Honey Queen
Bio: Once-upon-a-time, Christina Mercer worked as a CPA. Though she retired that formal hat, you can still find numbers buzzing around her head. She is also an award-winning author of young adult fantasy & paranormal romance. For much more about her and her writing, and/or to sign up for her monthly newsletter, visit her website.