Every business entity has to meets its
payroll tax obligations. If you are an independent contractor you are required
to pay self-employment tax as social security and Medicare payroll taxes. Since
you would be both the employer and employee, you are required to pay 15.3 percent
as a self-employment tax. In other entities, the employer and employee pay an
equal share of 7.65% of eligible wages and tax lawyers work with these numbers
every day.
Self-employment tax consists of 12.4
percent which is the social security (a failed program which needs to be
reformed – the numbers are not working anymore) tax on the first $106,800 of
your net income and a Medicare (another federal program that needs work) tax of
2.9% on your net self-employment income. You can reduce self-employment tax by
increasing your business-related expenses. Standard or itemized deductions and
SEP-IRA or 401(k) contributions will also not reduce your tax liability.
In addition, you need to remember that
you need at least 40 Social Security credits over your lifetime to be eligible
for retirement benefits so you may need to look at the “Optional Method”, the
rules of which are explained in Schedule SE, page 4. This shows you how to
increase your self-employment tax in years where you have experienced losses or
have made very low income.
Have you seen the movie Dumb and Dumber?
There income for many years would be considered very low.
Partnerships
Payroll taxes are in the form of withholding
taxes and social security and Medicare taxes. In a partnership, the employer is
obligated to deduct these payroll taxes from the employees’ salaries and
deposit the amount with the authorized government agency. Social security and
Medicare tax of 15.3% is shared equally between the employer and employee of
7.65 percent each. In addition, the employer is required to pay Federal
Unemployment Tax (FUT), State Unemployment Tax (SUT), and Federal Income Tax
(FIT) and tax attorneys have their calculators ready if there is any issues
here.
Most Americans know they pay too many
taxes as it is – it is wonderful that the private sector brought us oil shale
which has enabled America to challenge OPEC for the first time in decades which
has led to lower oil prices for everyone. If the EPA had a chance, the oil
shale industry would be shut down and that would less tax revenue for
government, fewer jobs, higher gas prices, and a happy OPEC.
Limited Liability Companies
Single-member limited liability
companies are required to pay self-employment tax on its profit. The tax is
calculated on a Schedule SE tax form. If a single-member LLC engages in passive
activities such as real estate investing then the LLC is not liable to pay
self-employment tax on its profits. Passive income needs to be reported in
Schedule E.
According to tax lawyers, in the case of
multiple-member limited liability companies that are treated as partnerships,
each partner pays self-employment tax on their share of the profit. Business
income needs to be reported on separate Form 1065 partnership tax return while
each partner needs to calculate their share of self-employment tax on Schedule
SE tax forms along with Form 1040 individual tax returns.
In the case of limited liability
companies treated as C corporations, the profits are not subject to
self-employment tax but pay payroll taxes on wages paid to members working in
the business.
For limited liability companies treated
as S corporations, payroll taxes are due on wages paid to the LLC owner who
works in the business.
Whatever form of entity you choose, it
is critical to fulfill your payroll tax obligations and deposit them on time. Failure
to file payroll taxes on time can lead to unnecessary penalties and
Wesley Snipes knows all about this. If you have an LLC treated as an S
corporation or as a C corporation it is advisable to consult a practitioner
such as a CPA or a tax lawyer to help prepare your tax return. If you need
legal help though, obviously you need a tax lawyer.
You may want to make that phone call
before you realize you must make that phone call.
Dollars, cents, deductions, dates,
numbers, and so on – the tax code is not intuitive. No one really gets it. That
is not the case with this digital powerhouse of a website Tax.USAttorneys that should
win a Nobel Prize for helping to bring sanity to a chaotic world. If you need
legal tax help, click away.
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