FICA Tax

Part 2 of your tax situation is the large amount of FICA, or Self Employment (SE) Tax, that we all pay. For self-employed people, FICA is a much larger amount than income taxes. Eighty percent of self-employed people pay more SE tax than income tax. There are no deductions or exemptions to reduce it. It starts at 15% on every dollar of net income of the business.

Losses on Schedule C may sound good this year, but they will cost you next year. A self-employed person who loses $10,000 one year and makes $10,000 the next year pays $1,500 more in FICA tax than someone who breaks even for two years. These two people have made the exact same amount and will pay the same amount of income tax, but FICA is calculated one year at a time without getting any benefit from negative amounts.

New businesses need to manage their tax situation to avoid this extra tax.