In an employer-employee relationship, half of Social Security and Medicare taxes are paid by the employer. When you are self-employed, you must pay the full Social Security and Medicare taxes on your own. This additional share is referred to as the self-employment tax. The self-employment tax rate is subject to change, but is currently 15.3%, which consists of 12.4% Social Security tax and 2.9% Medicare tax. For the 2011 tax year, the self-employment tax rate will change to 13.3%, which consists of 10.4% Social Security tax and 2.9% Medicare tax.
LLCs may be taxed either as disregarded entities or as corporations. Unless you have specifically requested to be taxed as a corporation by filing IRS Form 8832, your LLC will be taxed as a disregarded entity. This means that for income tax purposes, your LLC is “disregarded” by the IRS — the LLC does not pay its own income tax. Instead, the income “passes through” to the LLC members who claim the income on their own income tax returns. This is why limited liability companies are often referred to as pass-through tax entities.
If your LLC is a disregarded entity, you must claim your share of the LLC’s income on your personal tax return and pay self-employment tax on your earnings. Report the income on Schedule C and calculate your self-employment tax based on that year’s self-employment tax rate. All needed information is printed on the Schedule C form.
Remember that you may deduct half (50%) of your self-employment tax from your adjusted gross income. Though this will not affect your self-employment tax rate, it will affect the amount of your income subject to income tax and save you some money. Additionally, any income above $106,800 is free from Social Security tax.
You must generally pay quarterly estimated taxes if you are subject to self-employment tax, so consult an accountant or tax preparer to assist you with your planning.