Remaining compliant with California’s self-employment tax can be a burdensome process. You must understand what qualifies as a self-employed individual, and you also have to know the appropriate amount of taxes that you must pay. While employees at a California-based business will have their taxes automatically deducted from their earnings, a self-employed individual must remain diligent when calculating taxes to avoid drawing the ire of the Internal Revenue Service. If you require assistance calculating your taxes as a self-employed individual, you should consult with an experienced Roseville tax attorney. The NewPoint Law Group is here to discuss how to calculate self-employment tax in California.
When are You Self Employed for CA Tax Purposes?
The IRS and the state of California use similar definitions regarding what constitutes a self-employed person. For example, an individual that operates as sole proprietor or as an independent contractor will be considered self-employed under the law. An individual who is not considered the employee of a legal entity, or who runs their own business, can also be considered self-employed. The following is a list of some other types of individuals who are considered self-employed in California:
- Members of a partnership
- Members of a limited liability company that operates as a partnership
- Part-time business owners
To learn more about the requirements for self-employment in California, you should speak with an experienced California tax attorney.
When Do You Owe Self Employment Tax?
In California, you do not owe self-employment tax if your net earnings are less than $400 for the year. To calculate your net earnings for the year, you must add up your income and subtract your expenses. If you come up with a number that is $400 or more, you will have to pay the self-employment tax.
Depending on the complexity of your business, this may seem like a daunting task. Our tax return planning attorneys can help you determine what income should be included in these calculations.
Like employees who have taxes deducted from their paycheck every time they are paid, self-employed individuals are also tasked with paying taxes throughout the year. However, those who are self-employed are permitted to pay taxes on a quarterly basis. While this is advantageous in certain circumstances, it can quickly become an issue if a self-employed person does not have a proper system for consistently subtract taxes from their earnings. This can be made even more difficult if you are unsure of your anticipated earnings for a specific quarter.
California and the IRS have the same schedule for when a self-employed individual must pay their taxes:
- First quarter payment: Due April 18th
- Second quarter payment: Due June 15th
- Third quarter payment: Due September 15th
- Fourth quarter payment: Due January 15th of the next year
Self-employed individuals can use this schedule to make payments each quarter that equal 25 percent of their annual tax estimate. If you are self-employed, you must still file your annual taxes. When filing with the IRS, the self-employed must use Form 1040-ES. When filing with the California Franchise Tax Board, you must use the 540-ES form under Schedule C.
The tax rate for self-employed individuals in California is 15.3 percent. Of that, 12.4 percent is distributed to Social Security with a limit of $118,500 of net earnings. The remaining percentage will be allocated to Medicare, which does not have a collectible limit.
If you fail to make your quarterly payments, you will likely incur state and federal penalties. For example, interest could accrue on every payment that was not made to the IRS. In extreme situations, you could end up with an IRS tax lien on your property. The IRS could file for a tax lien under the following circumstances:
- You owe more than $10,000, and your account is deemed non-collectible
- You owe $10,000 or more, and the payment plan you set up will not eliminate the debt within 72 months
- You have an unpaid balance of over $50,000, and you negotiate a payment plan
There are several other scenarios where the IRS may issue a tax lien. Staying informed about IRS practices can help you weigh your options when facing delinquent payments.
Our Tax Planning Lawyers Can Help Determine Your Self Employment Taxes
At the NewPoint Law Group, we are dedicated to helping you find an efficient way to calculate your self-employment tax. Our tax planning lawyers possess extensive experience on a wide range of tax issues, and we are prepared to represent you. Staying current on state and federal tax law is difficult, but we are here to help you. Our attorneys have served clients in Roseville, Folsom, Huntington Beach, and across California, and we would be proud to represent you. To schedule a confidential legal consultation, call us at 1-800-358-0305.