With so much conflicting information about the California self employment tax process floating around online, it can often be difficult for a lot of people to figure out precisely what these taxes are, how they're calculated, paid, and what the consequences of non-payment might be.
We're here to help demystify California self employment taxes so that you can focus your energies on growing your business instead of worrying about your tax return.
When you're employed by someone, be it in a part-time or full-time job, your employer is responsible for withholding taxes from your paycheck. It's their responsibility to not only withhold taxes but to also pay them to the government.
Things are a bit different when you're working for yourself, or in simpler words, when you're a self employed individual. Your clients won't be withholding taxes on your behalf. It's entirely your responsibility to withhold and pay taxes on the income generated from your business.
For taxation, self-employed people are deemed to be independent contractors, since they’re not employed by the client. Thus the California independent contractor tax rate applies to all earnings from the business. The collections are performed by the Franchise Tax Board. They're responsible for collecting personal and corporate income tax for the State of California.
You're required to pay taxes on the income you generate from self employment in California. The self employed taxes California collects funds Social Security and Medicare only. The CA self employment tax does not include any other taxes.
It's not uncommon to be confused about whether you are liable to pay self employment taxes in California. You might be under the impression that the small business you’re running isn't taxed or you might think that your little side hustle doesn't create any tax liabilities. It's imperative to understand who is liable to pay these taxes in California.
The IRS considers you to be self-employed if you:
Are practicing a trade or operating a business as an independent contractor or as a sole proprietor
Are a member of a partnership that carries on a trade or business
If you're otherwise in business for yourself, including a part-time business
For example, you could be a freelance designer or writer, and you'll be considered self employed for taxation. The same applies to professionals such as tutors, lawyers, physicians, etc who are not employed by an organization and are in business for themselves.
You will only owe self employment tax in California if your net earnings are more than $400 for the year. You can calculate your net earnings by subtracting your business expenses from your business income. If your income is above this threshold, you’ll be required to pay a fixed California self employment tax rate. We provide examples below to show you how you can properly calculate your self employment tax.
People who are self employed are allowed to pay their taxes every quarter. This can be advantageous in most situations but it might also end up becoming an issue if your bookkeeping isn't accurate enough to consistently account for quarterly tax payments. This can become even more difficult when you're unsure of what your earnings could end up looking like at the end of the quarter.
Understanding if you owe self employment taxes in California is quite simple. If you're a sole proprietor, you'll be liable for self employment taxes if you have a net profit of $400 or more annually. Individuals with a corporate structure such as a partnership or LLC are also liable for these taxes provided that they post a net profit of $400 or more annually.
If you owe self employment taxes in California, you're typically going to make estimated quarterly tax payments based on the best guess of your annual income for the tax year in question. It can be difficult for self employed people to predict their income. However, since taxes are required to be paid in full, you must estimate what your annual income for the year will be and pay taxes based on that.
You're required to make estimated payments if you expect to owe at least $500 in taxes. Additional provisions are to be kept in mind if you expect withholding and credits to be the lower of these two amounts:
90% of the tax shown in your previous return
100% of the tax shown on your return for the year before that
The California self employment tax rate for 2022 is 15.3%. As previously discussed, this includes your Social Security and Medicare taxes. Those who are self employed need to cover the entire 15.3% of these taxes in addition to paying the normal income tax rates.
You don’t need a sophisticated California independent contractor tax calculator to figure out how much you owe. There’s a simple formula that you can use to make the proper calculations, regardless of whether you have a sole proprietorship or LLC.
Find your net earnings by subtracting business expenses from your gross income
Multiply that number by 92.35%. This is the amount of your income that's subject to self employment tax
Multiply this number with the 15.3% tax rate to get the exact amount of taxes that you owe
You worked as a freelance writer and earned a net income of $30,000 last year. Multiplying that by 92.35% gives you $27,705 as your income subject to self employment taxes. Now you multiply this taxable income by the prevailing 15.3% tax rate and you get $4,238. This is what you need to pay in self employment tax.
Taking advantage of tax deductions is a great way to reduce your tax bill. It can be difficult to figure out which deductions you can claim. Remember that improper claims will result in penalties, so be careful when taking the deductions. Generally, most self employed people can take education, home office, auto expenses, health insurance premiums, and other deductions.
Remember, there are strict conditions to be met for most of these deductions. For example, home office deductions require that you use part of your home regularly and exclusively for your business. This enables you to partly deduct utility bills, insurance, and other related costs against your self employment income. Misrepresenting facts when claiming tax deductions in your return will likely trigger a 1099 audit.
You need to adhere to the following schedule for making quarterly tax payments. It applies to both the IRS and the Franchise Tax Board.
1st quarter payment due: April 18
2nd quarter payment due: June 15
3rd quarter payment due: September 15
4th quarter payment due: January 17
Certain steps need to be followed to make your tax payments. The IRS Form 1040 Schedule C is what you'll use to report the earnings from your business. Next, you have to fill out the IRS Form 1040 Schedule SE to calculate your self employment taxes. Fill out the IRS Form 1040 to file taxes.
Make payments using the IRS Form 1040-ES and FTB Form 540-ES. These forms come with payment vouchers for use by mail. The Electronic Federal Tax Payment System can also be used to make the payments. The Franchise Tax Board offers free online filing on Calfile.
You will be charged a penalty if you don't pay your self employment taxes on time. This will include state and federal penalties. Furthermore, interest will also accrue on every payment that's missed. In extreme cases, you could even end up with an IRS tax lien on your property.
If you miss estimated tax payments and the amount withheld from other income is less than 90% of your total tax bill, a penalty will be given to you based on the percentage owed. 5% of the unpaid tax due on that date is charged by the Internal Revenue Service as a penalty in addition to 1/2 of 1% for each month or partial month the outstanding liability remains unpaid.
This isn't charged beyond 40 months and the maximum penalty is 25% of the unpaid tax. Interest is charged on outstanding payments from the original due date to the date paid. The interest compounds daily.
Penalties may also be handed down for:
Returned checks due to insufficient funds
Substantial underpayment of taxes
Negligence of payment
Failure to pay the tax shown on the income tax return by the due date
In certain circumstances, you may be able to get an abatement. This is a reduction or complete elimination of interest penalties in circumstances that may include
Extreme financial hardship
IRS or FTB delay or error
Military personnel posted outside the US
Reliance on formal written advice
There's also a First-Time Penalty Abatement Program that's applied to a first-time penalty charge based on the taxpayer's history.
It’s quite easy to understand freelancer taxes in California. Calculating them is simple enough and there’s plenty of guidance available should you need assistance throughout the process.
Deductions are a great way to reduce your overall tax bill but it’s important to be mindful of what you’re claiming. Only make deductions that you’re able to justify and can provide proof to back them up in the event of an IRS audit.
If you feel that you have been incorrectly identified as a 1099 worker by your employer, you should get in touch with an independent contractor misclassification law firm to discuss all of the options available to you to win back lost wages and benefits.
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Last updated: June 3, 2023
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