As a creative entrepreneur, freelancer, or independent artist, you're likely focused on perfecting your craft and building your client base. But there's one financial reality that catches many new self-employed individuals off guard: self-employment tax.
What Is Self-Employment Tax?
Self-employment tax is how independent workers contribute to Social Security and Medicare.
When you work for an employer, you have deductions on your paystub for these programs—typically around 7.65% of your wages. But that's only half of what's actually being paid. Your employer pays the other 7.65% behind the scenes.
When you're self-employed, you wear both hats—employee and employer. This means you're responsible for the entire 15.3% contribution yourself.
Here's the crucial part that surprises many creative entrepreneurs: Even if you earn too little to owe income tax, you still must pay self-employment tax on your net profit.
Calculating Your Self-Employment Tax Burden
Let's look at a simple example:
If your creative business generates $10,000 in net profit for the year, you'll owe approximately $1,530 in self-employment tax (15.3% of $10,000). And that's before calculating any income tax you might owe.
Reducing Your Self-Employment Tax Burden
I still remember the shock of my first self-employment tax bill. As a 23-year-old creative entrepreneur, I was blindsided by a $1,500 tax bill I couldn't afford.
Through this experience, I discovered the most effective way to reduce self-employment tax: taking advantage of every legitimate business deduction available, which brought that $1,500 tax bill down to a few hundred dollars.
The lower your net income, the less self-employment tax you'll pay.
Want to learn more about maximizing your business deductions? Watch for my upcoming article on identifying and documenting every deduction your creative business deserves!
Planning for Self-Employment Tax
To avoid a surprise tax bill, calculate and set aside approximately 15.3% of your net business income (that's your revenue minus your expenses) each month. This proactive approach ensures you'll have funds available when it's time to pay your taxes.
Get Help Managing Your Self-Employment Taxes
A good CPA or tax preparer who is experienced with small businesses will be able to help you calculate and minimize your self-employment taxes.
For a comprehensive guide to tracking and maximizing your business deductions, check out my Revenue & Expense Mastery Workbook—coming soon! This practical resource includes worksheets to help you identify and document every deduction you deserve, potentially saving you thousands in taxes.
This article is part of the Artist's Business Codex series, a collection of resources designed to make business concepts accessible to creative entrepreneurs.
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