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Are Commissions Exempt from Self Employment Tax?

written by: Melanie Bremner•edited by: Elizabeth Wistrom•updated: 8/3/2010

If you have often wondered if you need to claim the commissions you have earned while working for yourself, this article will share with you what you need to pay, and how you can go about finding the information and forms you will need.

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    With the economy not holding on as strong as we have previously known it, many people are looking to become self employed. There are numerous opportunities online for those motivated individuals who want to earn money while working out of their own home office. One of the easiest businesses to start is affiliate marketing. You do not need a product and your main objective is to drive traffic to the affiliated site where interested parties will then buy a product or service, or complete a form and you will then earn a commission. The question then remains for those who get started in a self employment opportunity like this, is, “Are commissions exempt from self employment tax?"

    It is your duty to complete your taxes as someone who is self employed, therefore, you need to know all of the laws governing this aspect of business. In the following article, I will cover some of the concerns that new business owners encounter when trying to decide what they need to pay for taxes.

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    Know the Laws in Your Country or State

    Laws vary depending on the country, city and state you may live in. Some believe that if you are a Canadian earning commissions from companies that are American, that you do not have to claim your commissions because the government cannot regulate American earnings.Though,if you are an American who is self employed earning commissions, you will often find that in order to work with these companies, they will not send you any commissions earned until you have filled out your W-9 tax form and sent it in to them. In this regard, you are obligated to claim your commissions on your taxes, as they will be claiming the income they have paid you. In a situation such as this, the answer to the question, “Are commissions exempt from self employment tax?", would be, no, they are not.

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    Look Into the Other Benefits of Being Self Employed

    While you may feel bad about having to claim your commissions, there are other benefits to being self employed. You are now eligible to claim a portion of your rent-providing you have a working office room and are not just sitting at your kitchen table with a laptop. You can write off certain lunches, dinners, a percentage of your cable/Internet bill, phone bill, etc if you use it for your business.If you use your car for attending business trips or meetings, you can also deduct a percentage of those costs. These expenses may make up for some of the money you will be having to pay taxes for on your commissions.

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    Understanding the Self Employment Tax

    While you still need to pay the SEP or Self Employment Tax while living in the United States, this is based on your income after all expenses have been deducted so may not end up being as much as you thought. Self employment tax is really only all of the moneys required for Medicare and social security. While you were working for someone else, you paid half the expense and your boss paid the other half. Now as both employer and employee, the whole burden falls on you to pay it all yourself, which is up to 15.3%. If you make less than $500 per year, you will not have to pay this. If you are lucky enough to earn more than $106,800 a year, your Self Employment tax drops down to only 2.9%.

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    Speak with a Professional Tax Representative

    If you are still wondering what your obligations are and how they need to be recorded on your tax forms, or where you can get all the proper forms you may need, you can speak to an accountant, a tax agent from H&R Block or other tax office in your neighborhood, or you can read up on the government site available for small businesses. Knowing beforehand what you need to claim, having all of the right documentation and receipts at hand, can save you a lot of stress and aggravation in the long run.