Home » Advice Tailored for You » Building/Remodeling
» Employment Tax Reporting

Employment Tax Reporting

Self-employment tax includes contributions both to Social Security and to Medicare. Be sure to make regular estimated payments, document your deductions, and send a 1099-MISC form to your own contractors.
By: 
Vanessa Drucker
Issue Date: 
October 2007
Being self-employed means more autonomy and flexibility. But it also means taking responsibility for filing and paying self-employment taxes, and shouldering the full burden of Social Security and Medicare contributions.

“Fortunately, the computation is cut and dried,” says Terry Eckert, tax/audit manager at Candy & Schonwald in Dallas. “It depends basically on making sure the self-employment income is correctly calculated, and that the deductions are adequately documented.”

The tax, according to the IRS, which runs at 15.3 percent, consists of two elements: the Federal Income Contribution Act (FICA) component, which funds Social Security benefits, makes up 12.4 percent of the total outlay; and the Medicare portion accounts for the remaining 2.9 percent. The FICA element, capped at $97,500 of income for 2007, goes up each year, and should reach $102,300 in 2008. There is, however, no income ceiling for the Medicare segment.

It is possible that you might pay only one of the income or self-employment elements. Although most contractors work at a profit, your actual income tax might generate losses from offsets, such as a partnership loss. Conversely, other sources of income, such as dividends or interest, might not attract self-employment tax.

Both income tax and self-employment tax, which is reported on IRS Schedule SE and attached to form 1040, add up to the total amount of tax owed, so you will not segregate them for the purpose of your estimated payments, which need to be filed quarterly, in order to avoid penalties. Since no tax will be withheld for you, you usually can rely on the safe harbor rule by taking care to pay tax on 90 percent of the current year’s income.

Watch your documentation for all your deductions, Eckert warns. If some of the deductions are disallowed in an audit, both your regular income and self-employment taxes will increase “in one fell swoop,” he adds.


Sidebar Title: 

Do You Use Subs?

Sidebar Body: 

Chances are, you will use the services of your own network, such as painters, drywallers, framers or concrete workers. You may deduct the costs of paying these contractors. “Much as a customer issues a form 1099-MISC each year to the contractor, the first contractor must likewise issue a form 1099-MISC to each contractor he hires, and report the amount he pays them,” says Terry Eckert, tax/audit manager at Candy & Schonwald. You need not declare annual disbursements below $600, except for those paid to attorneys, nor do you have to report those paid to a corporation.

The question then may arise, are your subcontractors true contractors, or could they, in fact, be considered employees? Employees are more expensive. Since employers must match tax payments, and also might be obligated to provide retirement and health benefits, they often would rather classify workers as contractors. Consulting these questions might help you decide.

  • Does the subcontractor perform services for other people beside you?
  • Do you provide an office or work area?
  • Does the subcontractor bring his own tools and rely on his own training?
  • Does he or she work according to a routine schedule?

The answers to all these questions will help clarify the relationship, according to industry standards.

*Note: This content is for informational purposes only. Lowe's makes no warranties and bears no liability for use of this information. The information is not intended, and should not be construed, as legal, tax or investment advice, or a legal opinion. Always contact your legal, tax and/or financial advisors to help answer questions about your business's specific situation or needs prior to taking any action based upon this information.