Self-Employment Tax
Categories: Tax
You're a shrink. You got your PhD in Psych, and your MD (so you can prescribe drugs...legally). You bill patients $400 an hour to whine to you about their mothers, and you put a loving balm in a bow and tie it up nicely so they don't jump off the ledge (this week). You're a professional. You work for yourself. You are self-employed. And this is both cool...and a drag. Were you working for some large mama corporation, you'd be able to just have some secretary do your taxes, and take your withholding. And it's likely you'd just be on a salary of a few grand a week to do your thang. But as an entrepreneur, doing your own thang, you do all that...yourself.
It gives you freedom to be creative and spend your practice's profits as you wish. Like...you really have been missing Maui, and there's The Headshrinker Ball for a week there in January. You're gonna go. It's a business trip. Legit. All kinds of drug vendors there selling everything from Zoloft to Lexapro. The trip is totally tax-deductible. And what about that new fancy computer? You want it. You buy it. It's a business expense, but yes, you'll enjoy it...personally. Oh, and your car? Yes, you get to deduct a lot of those expenses as well.
Well, the IRS ain't stupid (usually). So to get around or make up for the fact that, as an independent business, you get to choose to take allllll kinds of deductions that you couldn't take if you were working for a big corporation, you pay a self-employment tax. Think: 10-12 grand-ish a year for the privilege of being able to be independent and write off all the things you want to buy that are businessish deductions. And keep you sane (for your likely less sane clients) at 8 bucks a minute.
Related or Semi-related Video
Finance: What is SEP?5 Views
Finance allah shmoop what is s e p or sepp
what's that i'm sorry we had to go there Think
simplified employee pension plan except it's basically a personalized pension
plan for business owners and is kind of a form
of an ira The company contribute some amount of money
to the sep and they get a tax deduction like
they can deduct that is just a normal expense of
running The business like engine is part of your normal
operating costs You're running a business That amount of money
is generally capped as a percentage of the total compensation
given to the employees And step is an obvious tax
deferment system for sole proprietors who can take advantage of
this delay in pink tax is a kind of way
to fund their own retirement The big catch here is
that what the big boss pays herself while she has
to pay to her employees as well Or rather she
has to contribute the same percentage to their set that
she has for her own compensation when the step is
finally distributed often decades later those distributions are then taxed
at normal ordinary income tax rates So yeah if you
own a small chain of dry cleaners shops specializing in
removing blood stains from clothing of mafia victims Well then
you probably have enough money where it makes sense to
set up your own set plan That way you can
defer income and taxes on that income to a much
later date when presumably your marginal tax rate will be
lower than it is today That is if today you've
earned two hundred grand and you're marginal tax rates forty
five percent then you only keep fifty five cents on
the last dollars that you earn But a couple of
decades from now well you might be retired having already
put your kids through assassins college and now instead of
needing one hundred sixty three thousand dollars a year in
net income after taxes while you live just fine on
fifty grand So as you distribute back to yourself you're
sepp which works just like that I remember instead of
paying forty five percent tax on that marginal dollar you've
distributed back to yourself Well now you only pay something
like twenty percent tax so you keep eighty cents on
those last dollars instead of only fifty five Well a
set plan highly encourages people to save for old age
or retirement The key differences between a normal ira and
accept well in a seth you the business owner are
the employer so only you contribute money to the sep
like in normal cos one of the big benefits the
company provides is matching a dollar for a dollar in
ira contributions So if you're saving five grand a year
into your eye right while your company with unlikely contribute
an additional five grand into it So yeah in a 00:02:43.75 --> [endTime] nutshell that is wass ab sip Maybe not Whoa