How the One Big Beautiful Bill Changes SALT Planning for 2025

Surprised by Self-Employment Tax? Here’s What Business Owners Need to Know

Update Understanding Self-Employment Tax: A Hidden Challenge for New Entrepreneurs For many small business owners transitioning from employee status, the concept of self-employment tax can come as a surprise. Imagine making $100,000 in profit only to find out that the actual amount you owe in taxes is substantially more than expected due to self-employment taxes. When a service provider discovers that they are liable for both income and self-employment taxes, confusion reigns, leading to cash flow crises and, sometimes, a rushed year-end scramble to cover unexpectedly high tax liabilities. Shocking Realization: The Double Tax Burden One common scenario highlights a crucial lack of information among many self-employed individuals. As employees, they consistently saw a portion of their income withheld for taxes— a simple equation that felt straightforward. Yet, upon becoming self-employed, they didn’t realize they’re now accountable for both the employee and employer portions of the payroll taxes, totaling a hefty 15.3%. This is a significant change because while employees have their contributions managed, self-employed individuals must take full responsibility for the entire tax burden. Breaking Down the Tax Calculation for Clarity Understanding how self-employment tax is calculated is essential to avoid unexpected debts. Using a piece of common advice from tax experts, let’s consider a hypothetical example of a business owner with $100,000 in net business income. First, they need to calculate self-employment tax, which involves a few straightforward steps: Net Income: $100,000 Taxable income for self-employment: $100,000 x 92.35% = $92,350 Self-employment tax: $92,350 x 15.3% = approximately $14,140. In addition, self-employed individuals need to factor in their regular income tax, further complicating their financial picture. The OBBBA and Its Impact on Self-Employment Tax Recent legislative developments, particularly the One Big Beautiful Bill Act (OBBBA), have pleasant implications for small business owners. The act permanently extends the Qualified Business Income (QBI) deductions, allowing eligible taxpayers to deduct up to 20% of their qualified income. This change significantly benefits individuals earning around $100,000, allowing for planning strategies to alleviate tax burdens. Advising Clients: Turning Confusion into Clarity For accountants and tax professionals, each surprise tax season reveals a golden opportunity to educate clients. Not only can they alleviate fears surrounding self-employment taxes, but they can also guide clients through developing proactive tax planning strategies. Rather than simply discussing the tax due, the conversation can shift toward planning deductions and leveraging various IRS allowances. Clients need to be made aware of strategies to reduce their self-employment tax obligations significantly through deductions such as home office expenses, retirement contributions, and health insurance premiums. Preparing for the Next Tax Season: Strategic Insights As a self-employed individual or small business owner, the key to managing these taxes effectively is preparation. By understanding not just what taxes are owed but how to plan for them, business owners can avoid panic as tax season approaches. Setting aside funds throughout the year for taxes and utilizing tools like payroll software can simplify this complex process. The self-employment tax can initially seem daunting, yet with the right knowledge and support, it's possible to navigate it successfully. For those managing their businesses, take the time now to understand your obligations, seek advice, and consider utilizing professional services to ensure your tax filing runs smoothly. As 2026 approaches, start preparing today.