How to File Self-Employment Taxes

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If you are self-employed, then filing your taxes can be a more involved item on your to-do list than it is for workers who are employees. 

Not only is it essential that you pay your self-employment taxes on time each year, but you also need to do quite a bit of legwork, as well. This work will ensure that you are:

  • Paying the correct amount of taxes
  • Paying at the correct time
  • Claiming the appropriate deductions, so you don't overpay

Learn more about paying the self-employment tax.

What Is the Self-Employment Tax?

The self-employment tax is calculated on Form 1040 Schedule SE, and it's a significant 15.3% of your net business profit. This represents the Social Security and Medicare taxes that you would otherwise share with your employer, each of you paying half on your behalf.

As an employee, you'd only pay 7.65% as an employee because of your employer's equal contribution. If you are self-employed, however, you are both employer and employee and must pay both parts.

If you are considering becoming self-employed, you should consider the tax obligations before you take the step. Pay your self-employment taxes by following these easy steps.

Determine Your Entity

Are you a sole proprietor? An S-corporation, C-corporation, or an LLC? An independent contractor?

Before paying your self-employment taxes, you need to firmly establish which class your business falls under, as the tax rules vary by classification.

You'll need to file self-employment taxes if your business made a net profit of $400 or more.

Calculate Your Payment

Next, you'll need to determine how much you need to pay. You can do this by talking to a tax accountant. The accountant can help you determine how much you will owe based on your past earnings or projected profits.

The self-employment tax rate is 15.3% and is made up of two parts: 12.4% for Social Security and 2.9% for Medicare. Self-employed people are also required to pay income taxes.

If you are an employee, these taxes are deducted from every paycheck, and the IRS receives them throughout the year. Since you don't have withholding if you are self-employed, you must make estimated tax payments quarterly so that the IRS receives regular tax payments throughout the year.

You will likely need to make estimated quarterly payments if you don't have significant deductions and will owe at least $1,000 in taxes throughout the tax year.

If you have been in business for a year or longer, you can determine estimated quarterly payments based on last year's income. Divide what you paid last year by four and pay that much each quarter. Your tax accountant can help you determine if you need to raise or lower this based on your current business projections.

Make Taxes a Priority

As a self-employed person, it's wise to set aside money each month for taxes, so you aren't hit with a huge tax bill—and no money set aside to pay it—come tax time.

A good rule of thumb is to set aside 30% of your income for your taxes for the year. If you have state taxes, you may need to adjust the amount you save to include your state taxes.

Pick Your Way to Pay

The Internal Revenue Service (IRS) allows you to make payments online through its website. You need to register for a PIN, and that can take a few weeks to process, so you should register well before the payment due date to make the payment on time.

You may also mail payments via standard mail, but you must send a check, money order, or cashier's check. Do not mail cash.

Make Sure You Pay on Time

It's also important that you pay your taxes on time, or it could cost you.

The IRS-imposed failure-to-pay fee is 0.5% for each month, up to 25%, of the amount of unpaid taxes from the due date until your balance is paid in full. This penalty can add up quickly.

If your business is in Texas or another area where FEMA issued a disaster declaration due to winter storms in 2021, the IRS has extended the filing and payment deadlines for estimated taxes. Instead of being due on April 15, 2021, first-quarter estimated taxes are due on June 15, 2021.

If you don't file your taxes at all, that comes with an even bigger penalty—5% per month up to 25%.

Determine Payment Frequency

You have a few options for when to send your estimated tax payments.

Pay the IRS Monthly

Ideally, you'll send the IRS money toward your self-employment tax every month in the form of estimated tax payments.

Technically, these estimated payments are referred to as quarterly estimated payments because the IRS won't start throwing interest and penalties at you unless you skip paying in a given quarter or you pay too little for the tax liability that you'll ultimately end up owing.

This doesn't mean you can't pay monthly, however. If you do, you're basically paying just a month or two in advance.

Let's say you have a net profit from your freelancing side gig of $2,000 at the end of January. Your self-employment tax would be $306 for that month ($2,000 x 15.3%).

You can send an estimated tax payment to the IRS right then and there so you won't have to worry about paying that plus two more months at the end of the quarter—or 11 more months' of profits at year's end, plus interest and penalties if you don't pay until then.

The IRS imposes these penalties because it really wants taxpayers to pay as they go.

Pay the IRS Quarterly

Paying monthly might not be too challenging if your business income is pretty steady, but that's not always the case with freelancers.

If you send the IRS money at the end of January, then you end up having a pretty bad February and March, you might really wish you could have that $306 back to help make ends meet. Your whole quarterly payment might work out to be only $500, and you've already contributed more than half of that in the first month alone.

The good news here is that you're actually paying for the quarter behind you when you pay estimated taxes four times a year. Here's how it breaks down:

  • Payment Period Jan. 1 through March 31: Due Date April 15
  • Payment Period April 1 through May 31: Due Date June 15
  • Payment Period June 1 through Aug. 31: Due Date Sept. 15
  • Payment Period Sept. 1 through Dec. 31: Due Date Jan. 15 of the following year

What to do? Set aside that $306 each month—or whatever you end up owing at month's end based on your net profit—in a segregated bank account. Don't touch the money.

Do this at the end of January, February, and March, then send the IRS a payment two weeks later on April 15.

Hire an Accountant

Use a reputable CPA and follow their advice. While it's never a bad idea to do research and be well-informed on your own—especially as a self-employed person—your accountant can help you save money by knowing certain deductions and rules that you may not be aware of yourself.

For example, depending on your circumstances, you may be able to deduct your retirement contributions or business expenses like the cost of raw materials. This deduction is an important part of making the most of your money.

If you are a college student or recent grad, you may be able to deduct your student loan interest, as well.

If you do hire an accountant, you should look for an accountant that you can trust and who will work with you. Ask family and friends for recommendations.

Consider State and City Taxes

Don't forget about state and local taxes. Your accountant will help you determine the amount you need to pay since the state income tax rate varies from state to state.

Generally, the payments for state income taxes are due at the same time as the federal payments, which can help streamline the process. Keep in mind that, like with federal taxes, you may need to make quarterly estimated tax payments.

Be sure to see if you owe city or other local taxes, as well.