When Timothy Geithner got paid not paying self-employment tax during his Senate confirmation statements to become Treasury Secretary, he blamed Turbo Tax, saying it did not recognize that he had to pay self-employment tax. Beyond the question of whether or not he should have been savvy enough to know that he had to pay self-employment taxes without a software program telling him to, comes the question of whether or not this software does the proper calculations for self-employment taxes .
Self-employment taxes are a combination of Social Security and Medicare tax. Social Security is a 12.4% tax that is applied to the first $ 106,800 of your income and not beyond. Medicare tax is applied at 2.9% on everything you earn, with no cut off.
Those taxes total 15.3% of your earnings. This seems a lot higher tax to pay than if you were an employee, and it is. The benefit of self-employment comes with discounts. For instance, you can deduct equipment like computers, business lunches, travel, home office expenses, and much more. And yes, Turbo Tax will help you with those deductions.
Yes Mr. Geithner's hoopla, it is almost impossible to have this software direct you to self-employment calculations.
Turbo Tax will ask if you have gotten a W-2 or a 1099 from an employer. If you indicate the 1099, Turbo Tax will automatically identify you as self-employed and add the self-employment tax to what you already owe.
Furthermore, if you attempt to offer zero as your tax amount, this program will warn you that you might be asked or wind up owed back taxes. From the point Turbo Tax identifies you as self-employed, it will help you to calculate all the obligations to which you are legitimately entitled. Basically the only way for Turbo Tax to miss that you are self-employed is for you not to tell it that you receive a 1099.