Who must may self-employment tax and why? Well, if you're self-employed, you will be responsible for self-employment tax. How do you determine your liability? For the purpose of determining self-employment tax, you are self-employed if you are a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself.
If you are a self-employed individual, you will have a Schedule C to attach to your Form 1040, and self-employment tax is computed on Form 1040, Schedule SE. Individuals must pay self-employment tax is they have net earnings of $400 or more and there are several sources of net earnings that are used when figuring your self-employment tax liability.
In most cases, net earnings include net profit from a farm or nonfarm business; if you operate more than one business, your net earnings from self-employment are the combined net earnings from all your businesses. The upside to operating more than one business: If you have a loss in one business, it reduces the income from another. Self-employment tax is the self-employed individual's contribution to social security and Medicare taxes; the old-age taxes of employment. The only difference between the employee and the self-employed is the employee's social security and Medicare taxes are paid half by the employee and half by the employer, when an individual is self-employed; he/she is responsible for the entire amount.
There are alternative methods that can be used for figuring liability of self-employment tax and they are: The Farm Optional Method and the Nonfarm Optional Method. These methods may qualify an individual to claim a larger Earned Income Credit or Child Tax Credit; they may also, however, increase your self-employment tax liability.
The maximum amount of earnings subject to self-employment tax is currently $87,000.00. Now, when figuring your adjusted gross income on Form 1040, you may deduct up to one-half of your self-employment tax liability and if you are member of the ministry or clergy you may request an exemption from self-employment tax from the IRS.
When must self-employment taxes be paid? Generally, the self-employment taxes aren't due until the end of the year, when your personal tax return is filed. Why is it this way? The self-employment tax isn't due until the end of the year simply because of the fact that many self-employed business owners don't file the net profit or net loss figures on their self-employment earnings, until the year's end. If there is a net loss, the self-employed individual receives a credit of self-employment tax due, in the amount of one-half of the amount due.
The self-employment tax is the self-employed individual's equivalent to the social security and Medicare tax deducted from employee's pay check each week. The wage earner's taxes are configured by their employer and are deducted on a weekly basis. The self-employed individual isn't required to make weekly payments of self-employment tax, but they are held liable for the full 15.3 rate, that is split between the employee and the employer in wage earning situations. In general, however, if you expect to owe taxes in excess of $1000 for the year, you are required to pay estimated taxes each quarter.
In summary, if you are self-employed, have net earnings of $400 or more, and file a tax return, you will be subject to self-employment tax. To learn more about individual liabilities, exemptions, and alternative tax methods, please visit the online site for IRS Forms and Publications at the IRS website. Topic 554, Publication 517 and 533 will provide more detailed and situation specific information.
Employment according to dictionary means service. Employment involves two parties; employer and employee. Usually there exists a form of contract or a set of terms and conditions in employment. The employer is the person who holds power and is ideally in the authoritarian position and the employee is the person hired to render service/labour. Employment is a very important facet of a working person’s life. To him, employment defines his existence; his life-style, standard of living and bare necessities of life are regulated by employment.
Individuals, in most cases are competent enough to manage employment issues or any employment related issues themselves. But in some cases, the situation becomes grave and tricky and legal help is asked for. There are well-defined laws in every form of employment. However, with changes in every field and every aspect of life, these employment laws are changing rapidly. Even the most tactful and competent employer seeks help of an Employment lawyer to keep things in control. This is from one point of view, i.e. the employer’s side of the story. Employees, working and serving whole-heartedly often become victims of ill-treatment, sudden dismissal or discrimination. Many king-size organizations have trade unions to maintain employee interests and job security. But they also need the advice of employment lawyers to save their interests fighting against the employer.
Duncan Lewis & Co. is one of the leading and fastest growing law firms in U.K. Since its birth in 1998, Duncan Lewis & Co. have earned both name and fame in serving country’s corporate bodies and individual private clients with quality legal advice and winning law cases of any form. Duncan Lewis & Co. is highly reputed for settling the most complicated employment disputes. Employment law is changing everyday with all new forms of modernity and you really need to take expert assistance to sort any employment issues.
Our clientele ranges from individual Employees to small or big Employers and we render our service to all of them alike. We assist employees in case of sudden change of employment contract, sudden dismissal, racial/sexual harassment, bullying at work, holiday/sick pay or maternity rights, employee representation at Tribunals and settling any other unique employment hazards. Our employment department is available to help you in advising or making any employment legislation. It includes all issues regarding drafting of contracts, making agreements and negotiations, dismissals, defending claims against discrimination and the like.
Duncan Lewis & Co. helps you resolve any employment related issues or disputes at competitive rates and you are sure to get value for money. Clients are satisfied by the quality service they get from us and contact us time and again, whenever needed. For any employment related advice, visit duncanlewis.co.uk for immediate results.
Anyone who works for an employer for a regular wage or salary automatically has a contract of employment, regardless of whether it is written or not. The majority of employees work under open-ended contracts of employment. In other words, the contract continues until such time as the employer or employee ends it.
Many other employees however, work under fixed-term or specified-purpose contracts which are contracts which end on a specified date or when a specific task is completed.
The contract of employment will include some or all of the following elements (regardless of whether the employer and employee have specified them or not):
The terms that the courts say are in every contract of employment. Examples include the duty of every employer to provide a safe workplace and the duty of every employee to carry out the job to the best of his/her ability. This part of the contract is occasionally referred to as "common law".
Terms that must be part of the contract as a result of laws passed. Examples include the right to take maternity leave. Such terms are part of the contract of employment even if the employer and employee do not specifically include them and replace any agreement between the employer and employee not to apply the particular law. So, the statutory right to take maternity leave overrides any agreement between the employer and employee that the employee will not take maternity leave.
Terms and conditions states must be in every contract, for example, the right of an employee to join a trade union.
Joint Labor Committee Regulations
In addition, custom and practice in a particular workplace may form part of a contract. An example would be a particular level of overtime pay for employees.
In the case of these items instead of giving each employee the details in writing, the employer may refer an employee to other documents, for example, a pension scheme booklet or a collective agreement, provided that the employee has easy access to such documents.
The statement of terms must indicate the reference period being used by the employer for the purposes of the calculation of the employee's entitlements under the Minimum Wage Act, 2000. (Under that Act the employer may calculate the employee's minimum wage entitlement over a reference period that is no less than one week and no greater than one month).
The statement of terms must also inform the employee that he/she has the right to ask the employer for a written statement of his/her average hourly rate of pay for any reference period (except the current reference period) in the 12 months prior to the date of the employee's request.
Note. Specific provisions in contract of employment
In recent times, some employers are adding in specific provisions in contract of employment that limit the ability of employees to work in a certain sector, with certain suppliers, clients, for a period following termination of employment. (For example, it may specifically state that the employee cannot work in a certain sector, with or for suppliers or clients of the former employer, etc.). There is nothing in employment law in that strictly forbids this, but there is no provision in employment law that allows this either.
Essentially, this is an issue of contract law - that is, the contract of employment signed and agreed between the employer and employee. If you have any concerns about this issue, you are strongly advised to seek legal advice from a competent legal professional in advance of signing this contract of employment. However, even if the contract of employment is signed, you are always free to seek such legal advice. Attorney fees can vary widely so shop around and obtain some quotes for legal advice before you proceed.
Note. Probationary period
The contract can include a probationary period and can allow for this period to be extended. The Unfair Dismissals Acts will not apply to the dismissal of an employee during a period at the beginning of employment when he/she is on probation or undergoing training provided that:
* the contract of employment is in writing
* the duration of probation or training is one year or less and is specified in the contract.
The above exclusion from the Acts will not apply if the dismissal results from trade union membership or activity, pregnancy related matters, or entitlements under the maternity protection, parental leave, adoptive leave and career's leave legislation.
Changes to your contract of employment.
Changes to your contract of employment can occur due to a change in the law, but otherwise, changes must be agreed between your employer and yourself. The requirement for both the employer's and the employee's consent to changes in the terms of the contract is part of contract law.
From the above information you will see that the contract of employment is a very important document to have. Whenever you get hired, ensure that your new employer offers you this kind of security. Be cautious of employers who don't give contract of employment.
When there is a doubt over status of a worker being an employee or self employed the employer must make the correct decision or face potential serious penalties relating to a change in status that can be applied retrospectively. In the absence of comprehensive legislation guidelines have emerged and must be applied to avoid potential unexpected liabilities of tens of thousands of pounds.
The employment status of a worker can be a veritable minefield for an employer if the wrong decision is made. Should an employer decide the status of a worker is self employed and treat that worker as self employed rather than deducting tax and national insurance the employer could be at risk of incurring a major financial liability for tax and national insurance deductions if the status of the worker is subsequently changed following an Inland Revenue enquiry.
If the status of a worker is changed from self employment to employee by the Inland Revenue the amounts paid to that worker would be regarded by the Revenue as not the gross pay but the net pay after deductions of income tax and national insurance. The re-assessment after adding the income tax and both employee and employer national insurance could increase the cost of that worker by more than 50%.
If a workers employment status is determined as incorrect by the tax authority the date at which the employment status was employee rather than self employment would also be determined. Such a status change and the applicable date could be applied several years retrospectively leading to a significant financial burden.
An employer cannot choose the status of a worker as employee or self employed. The status of the worker is dependent upon the rules of engagement and the working practices that ensue. There is also a tendency with long term engagement of self employed workers for circumstances to change and some changes could change the status of that worker from self employment to employee in the view of the tax authority.
The first essential question to be answered by an employer is whether the worker is being engaged under a contract of employment or whose services are being contracted. Due to the potential serious financial consequences of making the wrong decision it is important that the rules of engagement are set out and agreed in writing.
There is no statutory definition of what constitutes a contract of service and what constitutes a contract for services in relation to income tax and national insurance. In the absence of a statutory definition the interpretation of the nature of the relationship is open to debate and previous court judgments.
General rules which would indicate a worker was an employee would include scenarios such as is the work supervised, does someone state when, what and where work is done and how it should be done. Can the worker be moved from one task to another and does the worker work to set hours and paid on a set basis of hourly, weekly or monthly or receive bonuses or overtime payments. The existence of such conditions would indicate employee status not self employment.
There are many other factors which may determine employment status, for example if the worker takes the business vehicle home each day that would indicate employee status. Should the worker provide his own tools and equipment to perform the tasks and bear the costs of doing this then self employment would be indicated but should the employer provide such equipment then workers status is more likely to be interpreted as employee.
Factors which may determine self employment would include the worker using someone else to carry out the tasks at their expense, whether the work contained personal financial risk to the worker, has a fixed price been agreed regardless of time taken to perform the work. Other self employment factors would be if the worker can choose when and how to perform the tasks, whether they also work for other organisations and whether unsatisfactory work has to be corrected in the workers own time and expense.
The conditions under which a worker is engaged may be ambiguous and that can lead to problems as long term self employed workers and the relationship with the employer tends over time to slip into a pattern that might be interpreted as closer to that of an employee rather than self employment. In such circumstances what may have started as self employment may later be interpreted as employment in which case the specter of that workers cost being increased to the business by 50% going back years could become reality.
In all cases where there is doubt over the employment status the final decision becomes one of providing evidence and the weight of evidence for one side or the other. Often individual cases can rest on what may have been regarded as insignificant items at the time. For example granting the worker benefits normally associated with employment such as paid leave and even such items as access to subsidized canteen facilities could weigh the balance in favour of employment.
If an employer has doubts on the status of a worker the rules of engagement should be set out in writing at the outset and clarify the status as employee or self employment. If there is any doubt then the safest practice would be to treat the worker as an employee and deduct income tax and national insurance or engage the worker under the CIS sub contractors rules.
As a rough guide to the financial consequences of making the wrong decision or circumstances changing the status of a worker from self employment to employment without deducting tax and national insurance consider this example.
The worker has performed work for the business for 3 years as self employed and has been paid 25,000 pounds per annum. The normal work pattern is interpreted by the Inland Revenue as that of an employee not self employment.
The Inland Revenue could determine income tax of 5,000 pounds and national insurance of 2,000 pounds should have been deducted plus employer national insurance of a further 2,000 pounds. Over three years the bill for getting the decision wrong could result in an unexpected bill for the employer of 27,000 pounds. For a small business that level of additional cost could be the difference between survival and liquidation.