Calculating your self-employment tax

Calculating your self-employment tax

Operating your own business often means that your income tax return is more complex than someone who is employed by an outside company. Typically, employment taxes are withheld from an employee’s pay by an employer. However, owners of farms, ranches or groves that are treated as a partnership or reported on Form 1040 are often subject to self-employment taxes. When operating as a partnership or sole proprietor these taxes are remitted in the same manner as the owner’s income taxes, and are often included with quarterly estimated taxes, which are due April 15, June 15, September 15, and January 15.

One way to determine your self-employment tax is to use the Regular Method, for which you will multiply your individual earnings by 92.35 percent to determine your net earnings, then apply the FICA tax rate. The current FICA tax rate is 15.3 percent, which consists of a 2.9 percent Medicare tax combined with a 12.4 percent Social Security tax.

If your farm or ranch is considered to have a small income (gross income below $6,960 and net farm profit under $5,024), using the Farm Optional Method may significantly reduce or even eliminate self-employment taxes. Under this method, your net income is equal to two-thirds of your gross farm income.

There are some instances in which you will not apply FICA to your earned income. The excess over $113,700 is only subject to the Medicare tax, and you are exempt from self-employment taxes if your annual net income is less than $400.

Depending on the complexity of your income, there are additional methods you can use to calculate your self-employment tax liability and your tax advisor can assist you in determining the method that is best for you.

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column by STEVEN E. CRISMAN

BIO: Steven Crisman is the managing partner of Cross, Fernandez & Riley, LLP’s (C/F/R) Winter Haven office and leads their Agriculture Practice Group. He primarily serves the agriculture, manufacturing, warehousing and distribution industries. He has specific experience with citrus growers, cattle ranchers, citrus and other horticultural nurseries, citrus harvesters and other support industries as well as watermelon, blueberry and other growers.  In addition, Steve provides comprehensive tax and estate planning, attestation and business succession planning services.