Any individual engaged in a trade or business as a sole proprietor, partnership, or part of an LLC must pay self-employment taxes on net earnings. If you’re a real estate professional, you most likely belong in one of these categories and are also subject to this tax.
Self-employment taxes, as referred to by the IRS, include Social Security and Medicare. The term is not all-inclusive and does not include any other taxes that self-employed individuals may be required to file.
Here’s what you need to know:
1. The self-employment tax rate for 2015 is 15.3%.
- 4% going toward Social Security
- 9% going toward Medicare
- The income limit on this rate is $118,500. If your income as a real estate professional exceeds this amount, you will be required to pay an additional 0.9% in Medicare tax.
2. Deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income.
- This means you can subtract ½ of your self-employment tax from your total net earning for the year.
- Example: if you owe $3,000 for self-employment tax, you can claim an adjustment of $1,500, which reduces your income tax by $375 if you’re in a 25 percent tax bracket.
3. This is the amount you pay quarterly.
- While it may seem like you’re getting taxed in every direction for being your own boss, keep in mind that self-employment taxes are actually the same taxes that are being withheld from a standard employee’s paycheck. You can calculate your own self-employment tax by using a Schedule SE.
- If you are operating your real estate business as an individual and have not formed a partnership, you will report your net profit on a Schedule C which can be included on a Form 1040.
These payments should be included in your estimated quarterly tax payments, your small business bookkeeping and paid throughout the year. Federal estimated quarterly tax payment dates are due April 15, June 15, September 15, and January 15 each year.
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