Monthly Archives: February 2017

Self Care: The Self-Employment Tax

If you work for yourself, it doesn’t take you long to figure out that the American Dream has a few strings attached. One aspect of self-employment that people hardly ever talk about is the self-employment tax. Yes, you already pay income taxes, and depending on how you structure your business, you may be paying them quarterly.

But what about FICA? It’s not the government’s job to make sure that you, as a self-employed individual, are paying the proper amount into Social Security and Medicare.

That’s part of your job.

This is what we mean by the self-employment tax. According to the IRS , the self-employment tax “is a tax consisting of Social Security and Medicare taxes primarily who work for themselves.”

The first thing to remember that unless you make more than $400 in a year, you’re not required to pay the any self-employment taxes.  You’ll notice that the threshold for requiring to pay is lower than the amount required for a client to provide you a 1099.


You’ll also notice that there are two options for figuring your earnings to base your tax payment on: one for farmers and one for other kinds of self-employed individuals (the nonfarm optional method). The nonfarm optional method can be used if net profits are less than $5,457 and also less than 72.189% of gross nonfarm income, but you had net earnings from self-employment of at least $400 in two of the prior three years.

Please keep in mind, however, that the nonfarm income optional method can only be used five times by a self-employed individual.

When determining your income, make sure to clearly delineate between what you’re paid as a self-employed individual and any money you earn as the result of investing in something else – especially if the business you end up investing in is in a similar line to what you do. You also need to be aware of the IRS and court rulings regarding monies paid out as retirement. Retirement is just taxable income (depending if from a tax-deferred vehicle) not self-employment, and no FICA or medicare is taken out, just income tax based on your tax bracket.

Even if you’re not bringing in a lot of money yet as a self-employed trailblazer, you may want to consider going ahead and paying some self-employment tax voluntarily. Although you may not be legally required to pay, there is an advantage. You will be able to earn Social Security credits, which translate into higher benefit when you retire.

To LLC or not to LLC: that is the question

Being an artist or working in a creative industry as a freelancer isn’t always easy. Unless you’re fortunate enough to find steady clients and gigs, you feel like your professional life is forever going in a circle of feast and famine.  And, if you have worked as an artist of a creative freelancer, you know that being talented at what you do isn’t enough. That myth of the carefree artist with his head in the clouds and no notion of how the business world works is simply that – a myth. Being a great artist goes hand-in-hand with being a savvy businessperson, because as much as you love your art, you need to eat and keep the lights on, too.

One thing every entrepreneur thinks about eventually is whether to operate as a Sole Proprietorship or to form a Limited Liability Corporation (LLC).

In most cases, you’re probably going to start with and stay with a Sole Proprietorship. This is the easiest business to start because there isn’t much set up required. Although you may be required to get a business license, there isn’t any paperwork you need file unless you choose to “Do Business As” (DBA) a name besides your own. You may also want to consider going ahead and applying for an EIN (Employer Identification Number. While it’s not necessary for a Sole Proprietorship, it will help protect your social security number. It also legitimizes that what you are doing is more than a hobby. You report your earnings annually and you are responsible for paying self-employment taxes as well as covering contributions to Social Security and Medicare.

If you’re fine with all of that, and you’re careful with your accounting practices, then you will probably want to form a Sole Proprietorship.

Keep in mind though, that if your business should ever be sued, then you are personally liable for everything. And if you should lose, your house, your property, and other assets will be at risk.

Forming an LLC takes some legwork, preparation, and money. After you chose a name and make sure it’s not already being used, it’s time to file articles of corporation. Depending on the state you live in, expect to pay between $100 and $800. In Kentucky if you forgo the ease of having someone else do the heavy lifting for you, it will only cost you a $49 fee paid to the State Treasurer to file your articles of corporation.

Some states also require an operating agreement that outlines how your business is run; Kentucky, however, does not. You’ll then need to get an EIN (Employer Identification Number), which is free and can be obtained online at the IRS website. Keep in mind though, that you can only register for one EIN at a time. At this point, you can separate your personal and business assets. This is the main advantage for forming an LLC as an artist or freelancer.

Finally, you’ll need to register for state tax and unemployment insurance. Even if you happen to be your only “employee” you will still need to do these things in order to be in compliance of state law.

Depending on the nature of your work, forming an LLC might be overkill. Many artists and members in what is termed the “creative class” keep it simple. And, unless the kind of work you do expands to the point that you need to bring in extra help, you will want to seriously consider keeping your work life as least complicated as possible.

If you’re reading this and your business or business concept doesn’t fall under the umbrella of the “gig economy” or you don’t identify as part of “the creative class,” keep in mind that every entrepreneur has to make the decision at some point whether to operate as a Sole Proprietorship or as an LLC.

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