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11 Most Overlooked Tax Deductions

Updated for 2011

Self-Employment Tax

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Who Pays Self-Employment Tax?

Sole proprietors, partners, LLC members, provided no election was made to treat the LLC as a C or S corporation, dealers in commodities and options, and farmers may be subject to to self employment tax.

Note: A C corporation or S corporation owner/shareholder is an employee of the corporation and is subject to the same employment tax rules as any other employee.

Sole proprietors:

A sole proprietor is not considered an employee of his/her own business, and therefore, is not subject to withholding taxes on the income from his/her business the way any employee is on his/her gross wages.

Since no taxes are withheld from the income of a sole proprietor's business, the sole proprietor pays quarterly estimated taxes to cover:

Partners:

Like a sole proprietor, a general partner in a partnership is not considered an employee of his/her own business either.

Taxes are not withheld on partnership income distributed to a general partner.

Consequently, like a sole proprietor, each partner must pay his/her own taxes, including income taxes and self-employment taxes on net earnings from self-employment.

Limited partners:

A partnership may include general partners and investors called limited partners.

Unlike a general partner, who has unlimited liability for partnership debts, a limited partner is generally only liable up to the amount of his/her investment.

Retirement payments to partners are not subject to self-employment tax, provided:

Limited liability company (LLC) members:

LLC members owe self-employment tax when they-

Multiple-Member LLC:

Multiple-member LLC members, for tax purposes, are automatically treated as partners in a partnership unless an election was made to tax the entity as a corporation.

Single-Member LLC:

A member of a single-member LLC, for tax purposes, is automatically treated as a sole proprietorship unless an election was made to tax the entity as a corporation.

Dealers in commodities and options:

Dealers in commodities and options are subject to self-employment tax.

Farmers:

A farmers operating as a sole proprietorship (Schedule F) is subject to self-employment tax.

Cash or payments in kind under the Payment-in-Kind program are considered earned income and are subject to self-employment tax.

Statutory Employees and Self-Employment tax

Statutory employees are not subject to self-employment tax.

Statutory employees include full-time life insurance salespersons, commission drivers distributing certain foods and beverages, pieceworkers, and full-time traveling or city salespersons.

The employer of a statutory employee must withhold FICA taxes from the employee's income.

Next:

Self-Employment Tax: What is Net Earnings from Self-Employment? Computing Net Earnings From Self-Employment; When to Pay Self-employment Tax; More Than One Business; Net Operating Loss Deduction; Personal Exemption and Self-Employment Tax.

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