All About Self-Employment Taxes

all about self-employment taxes

Having a job that you are passionate about has its own perks and intangible benefits. It makes you happy, excited and motivated about work and, as a result, boosts your productivity and performance. Some of the happiest workers in the United States are those who are self-employed. These individuals have the satisfaction that comes with being your own boss, choosing the work you want to do, and having a more flexible work schedule.

The results of a Pew Research Study reveal that close to 15 million Americans are self-employed. In addition, more than 30 million full-time workers also have part-time businesses, also referred to as side jobs or side gigs. If you are an independent contractor, freelancer or sole proprietor, it is important to understand what the self-employment tax is, how it works, and what your tax obligations might be. This blog article from Balboa Capital has all of the important information you need to know about self-employment taxes.

Calculating self-employment taxes.

The IRS requires self-employed individuals to pay their estimated taxes on a quarterly basis, and file an annual return on or before the tax deadline. If you are self-employed, taxes will not be automatically deducted from your paycheck. You will be responsible for keeping your accounting information up-to-date and paying your taxes on time. One way to ensure that you meet your tax obligations is to set aside money throughout the year. That way, you will not have a cash shortfall that prevents you from paying Uncle Sam.

Determining how much money you should save to pay your taxes will depend on several factors. For starters, find out what your tax rate is, and check to see if your city requires separate taxes. For 2021, self-employed taxes are 15.3%, with 12.4% going to Social Security, and 2.9% going to Medicare. The first $142,800 you make will be subject to the Social Security portion. If you are a single filer and your net earnings surpass $200,000 in 2021, your Medicare tax rate might increase by an extra 0.9%.

Next, review your books and calculate your net earnings for each quarter, and for the year. The formula to get this number is easy. All you need to do is subtract your business expenses from your gross income. In 2021, 92.35% of your self-employment earnings is subject to tax by the IRS. Once you have figured out how much your net earnings are, apply the 15.3% tax rate. The resulting number is your self-employment tax for the quarter (or year).

Filing self-employment taxes.

You will need to file a Schedule SE (Form 1040 or 1040-R) if your self-employment earnings total $400 or more, or if you received a 1099 form from a business or entity you performed work for. If your net earnings were less than $400, you will still need to file a tax return if you meet one of the IRS’ other filing requirements. If you showed a profit, it will be included as part of your gross income. If you showed a net loss, you might be able to deduct it from your gross income. Check with your accountant or tax professional, as everyone’s situation is unique.

Making quarterly payments.

The IRS requires you to make quarterly estimated tax payments during the year if you expect to owe $1,000 or more in federal income taxes when your return is filed. You will need to use IRS Form 1040-ES to make quarterly payments of your estimated taxes. Here are the tax payment due dates:

Time Period Tax Payment Due Date
January 1 to March 31 April 15
April 1 to May 31 June 15
June 1 to August 31 September 15
September 1 to December 31 January 15 of the following year

If you are not completely sure how to file your self-employment taxes, it is a good idea to have an accountant or tax professional do it for you. They have the knowledge and expertise to make sure that your tax return is accurate and filed in a timely manner. This can greatly reduce the chance that you are audited by the IRS.

Potential tax deductions.

Being self-employed presents you with some nice tax breaks. First, you can deduct 50% of your self-employment tax when you file your tax return. That means if you end up owing $5,500 in taxes this year, you will need to pay that amount in quarterly payments. Then, when tax season rolls around, you can deduct $2,250 on your return, which is half of the $5,500 you already paid.

There are also a number of tax write-offs available to self-employed individuals. These include vehicle expenses, home office expenses (furniture, percentage of rent/mortgage, electric bills, etc.), office supplies (computers, software, etc.), and health insurance. There are limits to how much you can deduct, and they can change without notice. So, make sure you visit the IRS website or consult with a tax professional to get the latest rules and information.