By, Peter Jason Riley, Certified Public Accountant

We can see from this diagram that income from self-employment is subject to two levels of taxation:

The first is the 15.3% self-employment tax. This tax has 2 elements: 2.9% is Medicare tax and 12.4% is Social Security taxes that the IRS collects on behalf of the Social Security Administration. Medicare tax is calculated on all the self-employment income. Social Security tax is applied only on the first $97,500 of income in 2007 ($ 102,000 in 2008 - adjust annually). Remember that your personal exemptions and deductions for your home mortgage interest, real estate tax, and state taxes, etc., do not affect the calculation of this tax.

The second level is the federal income tax.

Other issues to be considered:

• In 2007 you will be allowed to deduct 100% of your health insurance costs as a trade or business expense.
• Your income will not be subject to withholding tax. However, you will be required to pay estimated taxes quarterly. We can work with you to minimize the amount of your estimated tax payments while avoiding any underpayment penalty.
• You will have to maintain complete records of your income and expenses. In particular, you should pay attention to recording your expenses in order to be able to take the full amount of the deductions to which you are entitled. See our special tax deduction checklists for more information on possible deductions you may be entitled to. Certain types of expenses, such as automobile, travel, entertainment, meals, and home office expenses, are subject to special recordkeeping requirements or limitations of their deductibility and require special attention.
• If you hire any employees, you will have to get a taxpayer identification number and will have to withhold and pay over various payroll taxes.
• You should consider establishing a qualified retirement plan. The advantage of a qualified retirement plan is that amounts contributed to the plan are deductible at the time of the contribution, and are not taken into income until the amounts are withdrawn. Because of the complexities of ordinary qualified retirement plans, you might consider a simplified employee plan (SEP), which requires less paperwork or one of the newer SIMPLE IRA's. If you do not establish a qualified retirement plan, you may make a contribution to an IRA.