How does an indie pay Social Security Tax?

June --

I'm an independent military advisor ... have been for 3.5 weeks.

I have had one gig as an indie. I think I am going to be OK on income taxes. But I have searched your website, how do I make Social Security payments from my indie check? I tried to search your site to find the answer w/o bothering you, never could. I

Thanks in advance for you assistance,
Dean
Colorado Springs, CO


Hello Dean,


Good question. On their earned income, self-employeds, just as do employees, must pay three different taxes to the feds: income tax; social security tax ; medicare tax. Employees have these taxes withheld by their employers. The employer sends the withheld tax to the government.

For self-employeds social security tax and medicare tax are combined into self-employment tax. That's SE tax.

On a self-employed's federal tax return in addition to other forms there is a Form SE on which SE tax is calculated. SE tax is then combined with income tax liability to come up with total tax liability.

The calculation is done on the 1040 tax return and is paid via the tax return.

Be sure to read this post Estimated Taxes.

Best,
June

"The Web" is not a recognized expert.

June --

Government Consultant. Indie for 3 years.

What are your thoughts on opening a SEP vs. a solo 401k. Since the SEP is limited by my net income I'd like the increased contribution limit of a solo 401k.

However, my understanding is that a solo 401k requires an indie to incorporate first?

F Rome


I so wish that F Rome and everyone else who says "my understanding is" would give me just a hint of where they get all this misinformation.

When indies send me an email I ask for some information. One of my questions is "Where do you get your tax info?"

Do you know what many of them answer? "The Web."

Well, "the Web" is not a recognized expert. Who on the Web? What on the Web?

I'd rather they tell me they got the info from Aunt Tillie. At least that's a source. A bad source but one you could put your finger on.

Anyway, F Rome has it wrong. You do not have to be a corporation to have a UNI-k, Which also goes by the names: one-person 401-k, a solo-k, an individual -k.

And a UNI-k does allow flexibility and a greater contribution than a SEP. I recommend it over a SEP.

Caveat: You may open a SEP up through tax return filing time in October for the previous year.

A UNI-k must be opened by December 31 of the year for which you will make the contribution. You do have until October of the following year to actually make the contribution.

-- June Walker

Help! I am self-employed. NOW what do I do?

June,


I recently began working for the US Dept of Commerce on a contract basis, so I have no taxes withheld and receive no benefits. I've never been a contractor before, and thus never had to pay my own taxes, so I'm wondering if there are any self-help resources out there for me, preferably any software that will do it for me??

Please help me!!
Andrew from Utah


Hello Andrew,

A word processing program cannot make you a writer. A calculator can't make you a mathematician. A software program cannot be your bookkeeper or accountant.

Switching from employee to self-employed status is daunting because nobody tells you where to start to get information -- and you need a lot of information.
As a new indie, the areas you need to learn about break down into:
*** Recordkeeping for income
*** What are dedcutible business expenses
*** Recordkeeping for expenses
*** What taxes do you pay
*** How do you pay taxes

I recommend you start by reading a short column on my website, such as: Is it a deductible business expense? and Estimated Taxes, a post on this blog.

If you like what you read there, I encourage you to buy a copy of my book, Self-employed Tax Solutions, featured in BusinessWeek. The book answers many of the most common self-employed questions in the same easy-to-understand style you'll find in my columns.

Solutions will give you a basic understanding of what it means to be self-employed. This understanding will give you the confidence to know which step to take next.

I wish you much success.

Best regards,
June Walker