What self employment tax you pay for your hair store ?
The self employment tax you pay as Self Employed consist of Medicare and Social Security taxes. If you are considered as a Self Employed business owner you must pay at least 15.3 percent of your earnings to cover these obligations. This is because you have no employer to withhold a portion of self employment tax.
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Reduce Self Employment Taxes with a Corporation or LLC
In general, if you are the proprietor or partners you usually pay periodic self employment taxes on your share of the company’s profits. However, the United States Internal Revenue Service (IRS) taxes employees of corporations and Limited Liability Companies, taxed as corporations, differently.
A corporation pays its share of employment taxes and withholds certain required income and employment taxes from employees’ salaries. Corporations and their workers pay these taxes only on the reasonable salaries paid to employees, not on the total profits of the corporation. Executed properly, this strategy may reduce self employment taxes.
How to save Self Employment Tax
Savannah , a sole proprietor of Hair Extensions USA, has a net income of $60,000. She pays, $60,000 x 15.3% = $9,180, in self-employment taxes.
Now Savannah forms a corporation. SHe pays herself a reasonable salary of $40,000 and leaves the other $20,000 in the business for future expansion. She pays Social Security and Medicare taxes (self employment tax) only on her salary, $40,000 x 15.3% = $6,120
By incorporating, Savannah saves $3,060 in self-employment tax.
Remember, the IRS still taxes profits not deducted as salaries at corporate tax rates. Your accountant can help you determine a strategy that will result in the greatest overall tax savings for your business.
How To Sell Hair Extensions does not offer tax advice or assistance please consult your tax adviser for specific guidance regarding tax benefits specific to your hair business.
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