If you’re an employee, your employer takes out contributions for programs like Social Security and Medicare from your paycheck each month. For employees, these contributions are called FICA taxes, and everybody has to make them under one name or another. If you’re a small business owner, the equivalent tax is called the self-employment tax, and the amount you owe is based on how profitable your business has been fiscal that year. In years of zero profit, you’ll pay zero Self-employment tax.
If your business is a sole proprietorship, partnership, or an LLC, you do not take a salary and therefore no withholdings are taken for federal income tax, state income tax, or programs like Medicare and Social Security. Of course, these taxes are still due.
If you are a sole proprietor, partner, or LLC member, you will instead need to pay these taxes when you file your personal taxes for the year. At that time, the self-employment tax is added to the income tax due.
Tax planning is an essential part of running a financially sound business, and tax law is complex. At AFEUSA, we make sure our members have access to high quality assistance with their biggest business hurdles, including business coaching from GoSmallBiz. GoSmallBiz offers resources for tax and accounting functions and more, all for the low members-only price of less than $1 a day. To learn more, visit GoSmallBiz.
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