The Complete Guide To Self-Employment Taxes
We go over what self-employment taxes are, how to file and pay your taxes, and everything in between. In no time, you'll be doing your taxes like an expert.
Congratulations — you decided to ditch the 9-to-5 and become self-employed. You’re working for yourself, choosing the clients you want to work with, and nothing is slowing you down. Then it happens. You open your mailbox, and there sits a 1099 form. Suddenly, you remember: Tax time is right around the corner.
For most people, tax time is stressful. If you’re newly self-employed, that stress can be further amplified, making it easy to let fear and panic take over. What are these forms you’re receiving in the mail? What forms do you file? When are self-employment taxes due? Is the IRS going to take all of your hard-earned money?
Relax. Yes, taxes seem scary, but preparing and filing taxes isn’t that bad for the self-employed. In fact, if you’ve filed your personal tax return yourself, you’ll find that doing self-employment taxes isn’t too different. And if you haven’t? Not to worry — you’ll catch on quickly. In this post for self-employment taxes 101, we’re going to break it down for you. This isn’t an overly complicated tax course, either. We will go over what self-employment taxes are, how to file and pay your taxes, and everything in between. In no time, you’ll be doing your taxes like an expert.
Ready to get started? Read on for our full self-employment tax guide!
Table of Contents
- What Are Self-Employment Taxes & How Do They Work?
- Who Qualifies As Self-Employed?
- How Much Should You Save For Self-Employment Tax Payments?
- When Are Self-Employment Taxes Due?
- How To Make Estimated Quarterly Tax Payments
- How To File Self-Employment Taxes
- A Few Final Self-Employment Tax Tips For Easier Filing
- Self-Employment Tax FAQs
What Are Self-Employment Taxes & How Do They Work?
If you’ve ever been employed, you already know how taxes work. You get paid an hourly rate or salary, less federal and state taxes. Federal and state income taxes are taken from your pay. Taxes are also deducted to pay into Medicare and Social Security programs. These taxes are calculated and automatically deducted from each paycheck. But what happens if you’re self-employed and don’t draw a paycheck from an employer?
If you are self-employed, you are still responsible for paying taxes. However, your taxes won’t be automatically deducted every time a client pays you. Instead, you will be required to file additional forms with your annual tax return and pay any taxes owed. In some cases, you may be required to estimate your tax liability and pay taxes every quarter (more on this later).
Here are the types of taxes you are required to pay and how they are calculated.
The Self-Employment Tax
Employees have their portions of Social Security and Medicare taxes deducted directly from their pay. As someone that is self-employed, though, you will be required to pay a self-employment tax. The 2021 self-employment tax rate is 15.3%. Broken down, this is 12.4% for Social Security, while the remaining 2.9% is allotted to Medicare.
Any person who has made at least $400 from self-employment income must pay the self-employment tax. Church employees paid at least $108.28 are also required to pay the self-employment tax.
The 15.3% self-employment tax rate represents what an employee and the employer pay. Since you serve as both, you may qualify for a 50% self-employment tax deduction that can lower your income tax liability.
Federal Income Tax
Federal income taxes are taxes that are assessed based on your taxable income. Federal income taxes are broken up into seven brackets. The rate you pay is based on how much taxable income you have and your filing status. Rates range from 10% to 37%, with the highest earners receiving the highest rates.
Federal income taxes are used to fund federal programs, such as national defense, social programs, law enforcement, and interest on our national debt.
Federal income taxes are calculated and reported on your federal return using IRS Form 1040. In some cases, a taxpayer may have overpaid taxes and is owed a refund. However, many self-employed individuals will find that they did not pay enough or even pay any taxes and owe the IRS.
State Income Tax
Most states also require you to pay income taxes, although a handful of states don’t have a state income tax. State taxes that are collected are used for a variety of purposes for the state, from education and healthcare to transportation and public assistance.
State income tax is paid to the state (or states) where you work — not necessarily where you live. State income tax rates vary, with some utilizing a flat rate and others using brackets similar to federal income taxes. A separate state return (or multiple returns, if you earned income in multiple states) is filed to calculate your state income tax liability.
Who Qualifies As Self-Employed?
A self-employed person is essentially their own boss, selecting their clients, choosing what hours to work, and setting their pay rate. This person performs work for a client or multiple clients for a fee. Some people own and run their businesses full time, while others may take on side gigs in addition to full- or part-time employment. There are several types of self-employed workers, including:
- Independent contractors
- Sole proprietors
- Gig workers
Those who are self-employed may get paid in a variety of ways, such as through an online freelancing platform, through their own websites or payment platforms, or via paper check. Unlike a payroll check, taxes are not deducted from self-employment income. Income taxes will need to be paid on all revenue received, and in most cases, self-employment tax is also a requirement.
How Much Should You Save For Self-Employment Tax Payments?
While it may be tempting to take all the money and run, you have to stop and think about taxes. Your self-employment income isn’t being taxed now, but you will still have to pay the IRS at tax time. Instead of being shocked with a hefty bill in April, plan ahead and start saving now for your tax payments.
You’re probably wondering how much to save for self-employment taxes. According to Dave Ramsey, you should sock away 25% to 30% of your pay for taxes. Other tax professionals and financial experts agree that you should save 25% to 30% of your earnings to cover income and self-employment taxes. Sure, it may reduce your funds now, but you’ll be stress-free when it’s time to pay your taxes.
When Are Self-Employment Taxes Due?
|Tax||Due Date||What Tax Form You’ll Need|
|Self-Employment Income Tax||April 15||Form 1040, Schedule C|
|Estimated Quarterly Taxes||January 15, April 15, June 15, and September 15||Form 1040-ES|
If you’re self-employed, you are required to file an annual income tax return with the IRS. Tax returns are to be submitted to the IRS by April 15. If this date falls on a weekend or holiday, returns are due on the next business day. You can e-file your return online or submit paper copies of your return by mail.
If you submit your return early, you aren’t required to make a payment at this time. However, you will be required to submit payment for your tax liability by April 15 (or the following business day if April 15 falls on a weekend or holiday). Many people simply send their payments at the time of filing. If you e-file, your payment options include using a credit card, debit card, or echeck. If you file by mail, you will need to send a check or money order — do not send cash.
Failure to pay your taxes by the due date will result in interest and penalties, so it’s important to pay as quickly as you can.
One thing to mention here is that it is possible to request an extension for your annual tax return. This gives you an additional six months to file your return. However, an extension does not give you additional time to pay. An IRS tax extension shouldn’t be used to postpone tax payments, as you could end up owing far more when late penalties and interest are added to your tax bill. If you need more time to gather your documentation and file, estimate your tax liability, send your payment to the IRS, and use the time you have to get your return in order.
If you find yourself in a situation where you cannot fully pay your tax liability, the IRS offers payment plans. You can learn more by calling the IRS or visiting the IRS website to sign up.
Estimated Quarterly Tax Payment Due Dates
While some self-employed individuals can simply file their annual returns, others have to make estimated quarterly payments. According to the IRS:
Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
Quarterly taxes are due each quarter. Self-employed individuals must complete and submit Form 1040-ES along with payment. IRS quarterly taxes are due by the following dates:
- April 15
- June 15
- September 15
- January 15
If any of these dates fall on a holiday or weekend, the due date will be the following business day.
How To Make Estimated Quarterly Tax Payments
If you’ve determined you have to make estimated quarterly tax payments, don’t worry — the whole process is actually relatively easy. Let’s walk through how to file and pay your quarterly self-employment taxes step-by-step.
Step 1: Calculate Your Estimated Quarterly Taxes
Your quarterly taxes are an estimate, but you want to make sure that this estimate is as accurate as possible to avoid not paying enough taxes. To calculate your estimated taxes, you will need to do the following:
- Calculate Your Estimated Annual Income: You can do this by looking at your returns and documents from the previous year. If you’re newly self-employed, you can review your records up to this point to estimate how much you will make for the year.
- Don’t Forget Your Deductions: Don’t forget to calculate any deductions you plan to take. Subtracting these deductions from your estimated annual income gives you your adjusted gross income (AGI).
- Calculate Income Tax: Multiply your adjusted gross income by the tax rate found in the current IRS tax brackets. These change annually, so make sure you’re using the correct numbers. The amount you come up with from your calculations is the amount of income tax you owe.
- Let’s look at an example. You have calculated your adjusted gross income, and it is $9,000. You are a single filer. According to the IRS tax brackets, your income tax is 10% of your adjusted gross income (AGI). Therefore, you multiply 0.10 (10%) x $9,000 and get $900. That means you owe $900 in income taxes.
- Calculate Self-Employment Tax: If you made over $400, you are required to pay the self-employment tax. To do this, you first take your estimated annual income (not your AGI) and multiply this by 92.35%. This number is your taxable income. Then, your taxable income is multiplied by 15.3%. The final number is the amount of self-employment tax you need to pay.
- Let’s take another look at an example. Your estimated annual income is $12,000. We multiply this by 0.9235 (92.35%) to get $11,082. This is your taxable income. Multiply your taxable income ($11,082) by 0.153 (15.3%) to get $1,695.55. This is the total amount of your self-employment tax.
- Add Income Tax & Self-Employment Tax Together: Take the two numbers calculated above and add them. Your income tax ($900) plus your self-employment tax ($1,695.55) equals $2,595.55. This is your estimated annual tax liability.
- Figure Out Quarterly Payments: Take the total estimated annual tax liability and divide this number by four. This will show you how much you need to pay each quarter. Taking from our example, $2,595.55 divided by four is $648.89. You will need to pay this amount by each due date.
Step 2: Save At Least 25% From Each Paycheck
Financial experts recommend saving 25% to 30% of each paycheck to cover income and self-employment taxes. Set up a separate savings account and immediately deposit at least 25% of each paycheck as soon as you get paid.
Let’s look at the example from Step 1. We determined that your estimated annual income was $12,000 and that your total estimated annual taxes were $2,595.55. Let’s assume you save 25% from each paycheck. Over the course of a year, this means that you saved $3,000 ($12,000 x 25%). Your estimated annual taxes are $2,595.55, meaning that you are saving plenty of money to cover your tax liabilities.
Step 3: Know When Estimated Quarterly Taxes Are Due
Knowing IRS due dates helps you avoid costly penalties. Knowing each due date will also help you avoid scrambling at the last minute to submit your documents and payments. Check out the four due dates and payment periods below:
- April 15: Due date for the payment period of January 1-March 31
- June 15: Due date for the payment period of April 1-May 31
- September 15: Due date for the payment period of June 1-August 31
- January 15: Due date for the payment period of September 1-December 31 (of the previous year)
These dates generally remain the same from year to year. However, any due date that falls on a weekend or holiday gets pushed to the following business day. Example: If April 15 is on a Saturday, payment will be due on Monday, April 17.
Step 4: Complete & Submit Form 1040-ES
Once it’s time to do your quarterly taxes, you need to complete IRS Form 1040-ES. This form has step-by-step instructions that make it easy for you to complete it accurately. You will need your estimated adjusted gross income and deductions to complete your form. Once you have completed the form and have determined your tax liability, the form will need to be submitted to the IRS.
You will also need to make your payment. The IRS makes it easy to make your estimated quarterly payments. You can submit payment directly through the IRS with a credit card, debit card, or electronic check. You can also mail in a check or money order. You can even make a cash payment in person through a retail partner. Addresses for submitting your 1040-ES and information about payment methods can be found in the instructions of Form 1040-ES.
How To File Self-Employment Taxes
Once you know how to do your self-employment taxes, it’s much less intimidating. You can accurately complete and submit your federal tax return in no time by following these steps. So gather your records, pull out your calculator, and get ready to file and pay your taxes.
Step 1: Collect Your 1099s
As someone who is self-employed, you can expect to receive Form 1099-MISC from any clients you have worked with that paid you more than $600 in a year. Even if you don’t receive a 1099-MISC from a client, you are still required to report this income.
The IRS requires that 1099-MISC forms be sent out by January 31, so keep an eye on your mailbox for the first few weeks of February. If you do not receive your 1099s by mid-February, contact your client. While you may receive your 1099s by postal mail, some companies and individuals opt to send their 1099s via email or an online platform.
Collect all of your 1099s and other income records (such as transactions posted through your accounting software). These will be required to calculate your income when filing your taxes.
Step 2: Calculate Your Deductions
Fortunately, you can lower your tax liability with deductions. Deductions are expenses that were paid to operate your business. There are a number of deductions you may be eligible for, including:
- Self-employment tax deduction
- Home office deduction
- Office supplies
These are just a few of the deductions that you can use to lower your tax liability. Check out the top 20 self-employment tax deductions to see how you can save on your taxes!
Step 3: Gather Your Tax Forms
Next, you need to fill out the appropriate self-employment tax forms, which may include:
- Form 1040: This is the US Individual Income Tax Return form. If you’ve filed for yourself in prior years, you’re already familiar with this form.
- Schedule C: This form is used to report the profit or loss of a business. Schedule C is used for reporting your income and expenses from your business. It is filed with your Form 1040.
- Schedule SE: Schedule SE is used for reporting self-employment tax. It is filed along with your Form 1040.
Step 4: Submit Your Return To The IRS
There are two ways to fill out your tax forms. You can do so online through tax filing software. There are a number of available options to file self-employment taxes for free if you meet certain conditions. Many tax software providers offer additional resources and tutorials to help you file your taxes and get the most out of your deductions.
You also have the option to download the paper forms directly from the IRS. Then, you fill out the forms and submit them by mail.
Step 5: Make Your Tax Payment
If you complete your return early, you aren’t required to make a payment just yet. However, you will need to make your tax payment by April 15 (or the next business day if April 15 falls on a weekend or holiday). This applies even if you’ve requested an extension.
As with quarterly taxes, the IRS offers many ways to pay. The easiest is with a credit card or debit card online. You can also use an echeck, pay by mail with a personal check or money order, or find a retail partner to make a cash transaction.
One thing to note here is that you may not be required to make an additional payment when your annual return is filed if you pay quarterly taxes. In rare instances, you may have even made an overpayment and will receive a tax refund from the IRS.
A Few Final Self-Employment Tax Tips For Easier Filing
By now, you should have a better understanding of what to expect when filing your self-employment taxes. But here are a few additional tips to help make the process even less painful.
Track Your Self-Employment Income & Expenses
Last-minute scrambling to pull up invoices and receipts can make tax time stressful — and increase your odds of making a potentially costly mistake when completing your return. Instead of doing everything at the 11th hour, track your income and expenses throughout the year.
The easiest way to track your income and expenses is with accounting software. Today’s accounting software offers a number of time-saving features, such as live bank feeds, automatic expense categorization, and receipt scanning. You may also have access to additional self-employment tools, such as invoicing, estimates, project management, and time tracking. Best of all, many great accounting programs are free or low-cost.
There’s no better time than now to get started, so take a look at our picks for the best accounting software for freelancers.
Keep Records & Receipts
Always make sure that you keep your records and receipts. This includes your client invoices, a mileage book, and receipts for all of your expenses. You (or an accountant) will use these records to calculate your income and deductions to ensure accuracy. These are also extremely vital if the IRS audits you. You should be able to back up your income and expenses, and your records and receipts are your proof.
There are several ways you can keep your records and receipts, but the key is to stay organized. For you, this may mean keeping everything filed neatly in a filing cabinet, securely scanning and uploading your records to cloud-based storage, or using your accounting software to scan receipts. No matter what method you use, stick with it, and stay organized.
Hire An Accountant
If you’re filing your taxes for the first time, you might want to consider hiring an accountant. Worried about the expense? Don’t be — you could actually save money by hiring an accountant.
An accountant can find deductions that you may overlook, resulting in a lower tax liability. An accountant can also make sure all forms are completed and submitted correctly. This helps avoid potential errors that could result in paying additional taxes, interest, and penalties.
If you decide to hire an accountant, make sure to have your records and documentation to save time (and money). Then, check out our post on finding the right accountant for your business to ensure you make the best choice.
With planning and preparation throughout the year, filing your self-employment taxes should be a breeze. Don’t forget to take advantage of the many accounting and tax software options out there to help you, or turn to a professional accountant to ensure your forms are accurate and submitted on time. Good luck!