Many self employed taxpayers in NY get in trouble with the NYS Tax Department because of the NYS self employment tax.
This article addresses how to stay out of trouble with the New York State Department of Taxation and Finance if you are self employed or own a small business.
Many business owners and self employed individuals who receive 1099 income are extremely frustrated with the amount of federal and New York State taxes they currently pay.
Most small business owners either try to do their taxes themselves or they have a preparer who doesn’t claim all available deductions, which leads to owing more taxes each year.
Many businesses are also set up incorrectly or in a way that is not beneficial to you, which also leads to owing more in taxes each year.
What is NYS self employment tax?
When you have a job as a W2 employee, your employer takes care of tax withholdings for you. That is, your employer withdraws your federal and New York State withholdings and sends it to the IRS and New York State Department of Taxation and Finance.
When you are self employed, you are responsible for the withholding and payment of federal and NYS income taxes and remitting those taxes to the IRS and NYS Tax Department.
In New York State, you are not just responsible for federal taxes; you are also required to pay NYS self employment tax if you are self employed or own a small business.
What are you responsible for withholding?
Self-employment taxes (FICA) are Social Security and Medicare only.
The first part is Social Security at 12.4%, up to a maximum capped amount of net earnings.
The second part of self employment tax is Medicare, which is 2.9%. Medicare is not capped and applies to all of your net earnings.
When you are employed, the FICA ( Federal Insurance Contribution Act) tax is 15.3%, which is split equally between the employer and the employee.
When you are self employed, you are responsible for FICA.
Are You Self Employed in NYS?
The first step is determining if you are self -employed.
Being self employed is a broad term when it comes to the Internal Revenue Service and NYS Tax Department.
Generally, if you own a small business as a sole proprietor or otherwise; operate as an independent contractor; or you are in a partnership, you are self-employed
As a general rule, if you derive income from a source and taxes are not withdrawn from that income, then you will likely have to deal with federal as well as New York State self employment taxes.
Whether you are operating as a sole proprietor, partnership, limited liability company, or corporation, you should seek counsel as to what your federal and NYS self employment tax obligations will be so that you do not get into hot water with the taxing authorities.
For example, a real estate agent sells a house and derives a commission from the sale of $10,000.
She received a check for $10,000 from her broker, without any deductions related to either federal or state tax income taxes.
The realtor in this example will need to compute her estimated taxes and remit taxes on a quarterly basis to the tax agencies.
About the New York Department of Taxation and Finance
The New York Department of Taxation and Finance collects personal income tax and corporate income tax for the State of New York. It also administers other tax programs for the state as well.
The Internal Revenue Service, or IRS, is the tax collection agency for the federal government.
New York State income tax rates range from 4% to 8.82%, depending on your income.
Do I Have to Pay NYS Self-Employment Tax?
As a general rule, if you are making over $400 in net earnings as either a sole proprietor; net profit as a self employed salesperson; partnership; or LLC, you have to pay NYS self employment taxes.
Because you do not have “regular income” when you are self-employed, you are required to make estimated quarterly taxes to the IRS and NYS Tax Department to ensure that your self employment tax obligations are met.
Quarterly estimated tax payments are required because there is no employer to withhold to withhold the taxes for you.
As such, you are required to remit taxes quarterly so that you do not incur a large tax bill that you are responsible for in the following tax year when your income taxes are due.
Your required quarterly estimated tax payments are based upon 90% of the income that you had on your prior year’s return.
However, if your income is either increasing or decreasing based on how well your business is doing, then your estimated tax payments can be adjusted accordingly.
If you underestimate your estimated tax payments and are unable to pay the taxes due, you may receive a penalty for failing to pay the taxes due plus interest from the date that the taxes were due.
Interest compounds on a daily basis.
Some self employed individuals mistakenly believe that filing an extension of time to file their taxes extends the time to pay their federal and NYS income taxes.
An extension of time to file never extends the time to pay the taxes that are due on April 15th.
