Tax Breaks for Charitable Giving: Maximize Your Impact and Your Savings
Category: Business
You pay self-employment tax when your net earnings from self-employment total $400 or more. Self-employment generally includes any business that you conduct as a
Self-employment does not have to be your primary source of income: if you have a day job and have a small business on the side, you may still be liable for self-employment taxes.
The logic of self-employment taxes is this: when a company employs you, the company pays a portion of your payroll taxes, and you pay a portion. When you are self-employed, you have to pay both your portion and the company portion.
Below we go through more detail about what self-employment taxes are, how to pay them, and some specific situations and their implications on self-employment tax.
Two taxes make up self-employment tax: Social Security and Medicare.
When you work for a company, your employer pays half of the tax and deducts the other half from your pay. Since as a self-employed individual you are both the company and the employee, you are responsible for both halves of these taxes.
Social security is the most significant part of the self-employment tax. The total Social Security tax is 12.4% of your income on the first $142,800 (in 2021) of your income. This maximum income amount increases every year, so verify the amount.
As an employee, you would pay 6.2% of your income; as a self-employed individual, you pay the full 12.4%.
The Medicare tax is 2.9% of your income, and there is no maximum. There is, however, an additional Medicare tax of 0.9% on Self-employed income over $200,000 (or $250,000 married filing jointly).
You are allowed to deduct half of the self-employment tax, which reduces the liability somewhat. Because of this deduction, 92.35% of your self-employment income is subject to tax.
Then you can deduct one-half of your self-employment tax from your federal income taxes (see the example below). This feels circular but works out as you will see.
This is where keeping good books and recording your expenses and income clearly throughout the year come into play.
The Self-Employment Contributions Act of 1954 requires every taxpayer to claim all allowable business deductions, including depreciation, in computing net earnings from self-employment. It also provides penalties for making false statements. So careful record-keeping can be beneficial in making sure you pay the correct tax.
Donna runs a business that has $250,000 in revenue and $150,000 in legitimate business expenses. Her self-employment tax looks like this:
When Donna computes her tax, she will deduct $7,065 from her federal income and pay $14,130 in addition to her federal income tax.
As with all tax situations, there are exceptions and specific rules that may affect your situation. Below are a few of these, but to give you specific advice we would have to review your specific situation.
This is income from activities you do without an expectation of profit; it is a recreational pursuit. An example might be if you are good with cars and your neighbor pays you to change the oil. Another example might be selling a few home-brewed beers to a friend.
Once these activities start contributing to your income, they become a business and are subject to self-employment tax.
Both guaranteed payments and general partners’ distributions are subject to self-employment tax.
The Department of Agriculture’s land diversion program makes payments to farmers and non-farmers. In the case of farmers, the payments are considered income and subject to self-employment tax. In the case of non-farmers, the payments are considered rental income and are not subject to self-employment tax.
Rentals are not subject to self-employment tax, but services are. So if you provide substantial services, such as in a hotel or a camp, the income would be subject to self-employment tax.
State laws that say income is earned one-half by each spouse do not apply for federal self-employment tax. The spouse who makes the income owes the tax.
Any income derived from services as a notary public is exempt from self-employment tax.
Fees paid to corporate directors that are not employment income are subject to self-employment tax.
Churches can file a certificate exempting them from paying the employer portion of social security and Medicare taxes. If you work for a church and the church has such a certificate in effect, then you will have to pay self-employment tax
Self-employment tax is due on salaries and other income for religious services. Housing allowance income may be subject to self-employment tax. However, members of recognized religious groups can apply for an exemption. Also, members of a religious order who have taken a vow of poverty are exempt from self-employment tax.
A child under 18 delivering newspapers to customers is exempt from self-employment tax, as is a child under 21 who performs domestic services for his or her parent. Additionally, a child under age 18 who performs domestic services in a private home of an employer is exempt from self-employment tax if the services are not the child’s principal occupation.
These cover most situations, but if you have any questions about your specific situation, be sure to ask us.
The advantage of a hobby is that you don’t need to pay self-employment tax. So if what you do is genuinely a hobby, this classification will help you. You just report your hobby income as “other income” on your 1040 form.
Gross hobby income equals gross receipts minus the cost of goods sold.
In the past, taxpayers could deduct certain allowable “ordinary and necessary” hobby-related expenses. This itemized deduction applied up to the amount of earned income.
However, the Tax Cuts and Jobs Act eliminated all miscellaneous itemized deductions. That means that hobbyists now cannot deduct any expenses but still need to report and pay taxes on hobby-related income.
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Category: Business
Category: Business
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
Audit support.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.