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 to 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 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. It represents the Social Security and Medicare (FICA) taxes that you would otherwise share with your employer, each of you paying half.
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 start. Pay your self-employment taxes by following these easy steps.
Determine Your Entity
Are you a sole proprietor, S-corporation, C-corporation, an LLC, or 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 net earnings of $400 or more.
Calculate Your Payment
Next, you'll need to determine how much you need to pay. You can do that by talking to a tax accountant, who 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 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 whether you need to raise or lower that amount, 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. That way, you aren't hit with a huge tax bill—with no money set aside to pay it—come tax time.
One 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 pay 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 you find yourself paying fees and penalties as well.
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 grow quickly.
Residents and business owners in Louisiana and parts of Mississippi, New York, and New Jersey were granted extensions on their deadlines for filings and payments to the IRS due to Hurricane Ida. Due to the tornado in December 2021, taxpayers in parts of Kentucky were also granted extensions. You can consult IRS disaster relief announcements to determine your eligibility.
If you don't file your taxes at all, that comes with an even bigger penalty of 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 taxes 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.
Suppose you have a net profit of $2,000 from your freelancing side gig 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' profits at year's end, plus interest and penalties if you don't pay until then.
The IRS imposes these penalties because it 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, and 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 would have 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 usually breaks down in most years (unless you are subject to an aforementioned automatic government-granted extension).
- Taxes for January 1 through March 31: Due April 15
- Taxes for April 1 through May 31: Due June 15
- Taxes for June 1 through August 31: Due September 15
- Taxes for September 1 through December 31: Due January 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 separate bank account. Don't touch the money. Do that at the end of January, February, and March, then send the IRS a payment two weeks later on April 15.
Hire an Accountant
If you work with an accountant, use a reputable CPA, and follow their advice.
You should always be well informed on your own, especially as a self-employed person. However, 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. Those deductions are important parts of making the most of your money.
If you are a college student or recent graduate, you may be able to deduct your student loan interest as well.
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 state income tax payments.
Be sure to see whether you owe city or other local taxes as well, such as tangible business property tax.
Frequently Asked Questions (FAQs)
What are the steps to filing self-employment taxes?
Here’s an overview of the process for calculating, reporting, and paying self-employment tax.
- Calculate business income: If you file Schedule C as a sole proprietor or single-member LLC owner, the amount on Line 31 “Net Profit or (Loss)” is the amount used to calculate self-employment tax.
- Calculate the amount you owe: You’ll need to use IRS Schedule SE to calculate the amount of the tax.
- Paying self-employment taxes: The IRS requires all taxpayers to pay the taxes on their income as they receive it, including both income tax and self-employment tax. Self-employed individuals don’t receive a paycheck, so you may need to make estimated tax payments each quarter during the year that include both income taxes and self-employment taxes.
How much tax do you pay if you are self-employed?
The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
All your combined wages, tips, and net earnings in the current year are subject to any combination of the 2.9% Medicare part of Self-Employment tax, Social Security tax, or railroad retirement (tier 1) tax.
An additional Medicare tax rate of 0.9 % applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012.