Key Takeaways
— If you’re self-employed, you’ll need to file taxes throughout the year, typically via quarterly payments.
— The self-employment tax is 15.3%, a combination of Social Security and Medicare taxes.
— There are other taxes you might have to pay, such as federal, state and local.
— Preparing self-employment taxes isn’t an easy process, so hiring a tax professional is recommended.
If you’re self-employed, you are responsible for saving enough money to pay your taxes because an employer isn’t doing it for you.
If you’re unsure about the ins and outs of self-employment taxes, here’s a quick tutorial.
What Is Self-Employment Tax?
The self-employment tax consists of Social Security and Medicare taxes, which you are responsible for paying.
The self-employment tax rate is 15.3%, and it breaks down to 12.4% for Social Security and 2.9% for Medicare. Self-employed individuals pay the 12.4% on the first $160,200 of their net income in 2023 (the taxes filed in 2024) — and the 2.9% for Medicare on all of their net income.
If that seems like an eye-popping amount of self-employment tax (and it may, the less money you earn), keep in mind that if you work for a company and have Social Security tax withheld, your employer is paying a portion of that tax on your behalf.
And the self-employment tax isn’t the only tax you’ll be paying. You’ll also be paying income tax and possibly state or local taxes.
Who Pays Self-Employment Tax?
Anyone who considers themselves self-employed pays the self-employment tax. As the Internal Revenue Service puts it, you are self-employed if:
— You carry on a trade or business as a sole proprietor or an independent contractor.
— You are a member of a partnership that carries on a trade or business.
— You are otherwise in business for yourself (including a part-time business).
The IRS says you have to file an income tax return if your net earnings from self-employment were $400 or more. However, if your net earnings from self-employment were less than $400, you must still report those earnings.
If you’re working for yourself you’ll also receive 1099 forms from the companies or individuals paying you. You’ll either get a Form 1099-NEC, 1099-K or possibly 1099-MISC.
[READ: What Is a 1099 Form and What Should I Do With It?]
If You’re Self-Employed, Are You Required to Pay Quarterly Estimated Taxes?
Self-employed individuals may need to pay quarterly estimated taxes. The IRS website states, “As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly.”
However, there are some exceptions. If you believe you’ll make less than $1,000 in a given year through your self-employment, you don’t have to pay quarterly estimated taxes.
“There can be another strategy for not paying estimated taxes, which may work if you’re keeping your day job or if your spouse works for an employer,” says Beth Logan, an enrolled agent and owner of Kozlog Tax Advisors based in Chelmsford, Massachusetts.
“If you have increased withholdings from your paycheck or your spouse’s, then those increased withholdings act as your estimated tax payments,” Logan says. “I will say that the spouse’s increased withholdings could be dicey if the couple splits up or decided to file separately.”
Failing to make quarterly estimated payments can result in a penalty for underpayment when you file your tax return. In addition, if you don’t make those estimated payments and wait until you file your taxes in April, you may have a hefty tax bill and possibly one that you can’t pay all at once.
[Related:What to Do if You Can’t Pay Your Taxes]
For most states this year, those estimated payments will be due on April 15, June 17 and Sept. 16 and Jan. 15, 2025, based on your profits for that quarter. You may have the option to use the Electronic Federal Tax Payment System and pay taxes monthly if that’s easier.
There is one exception to the estimated payment dates: If you’re a resident of Maine or Massachusetts taxes are due on April 17, 2024 due to state holidays.
[Read: Should You Be Making Quarterly Tax Payments?]
How to File Self-Employment Taxes
To file your taxes by April 15, 2024, take the following steps:
— Decide how the taxes will be prepared. Are you going to hire a tax professional? Purchase some tax preparation software and do it yourself? Or will you go old school and mail it in?
— Collect the necessary paperwork to file your taxes.
— File your taxes or send them to a professional.
— Plan for next year’s self-employment taxes by deciding how much your estimated taxes will be over the next year.
Decide Whether to Hire a Tax Professional
There are good arguments for hiring an expert rather than filing self-employment taxes on your own.
Matthew Maron, an assistant teaching professor of accounting at Quinnipiac University, in Hamden, Connecticut, recommends self-employed taxpayers hire a professional to prepare and file their taxes.
“There are a lot of moving parts with respect to the taxation of a self-employed individual, as well as numerous additional tax forms to be completed,” Maron says.
When you work for yourself, there’s a host of deductions available, and knowing what you can and can’t deduct can get complicated.
A tax professional may save you money and keep you from overpaying or underpaying your taxes.
[Related:How to Find a Reputable Tax Preparer Near You]
Collect Your Paperwork
The following forms are necessary to file self-employment taxes:
— Form 1040, also known as your U.S. individual income tax return.
— Schedule C, which records your profit or loss from your business.
— Schedule F if you’re a farmer.
— Schedule SE, which helps you calculate your self-employment tax.
— 1099 or 1099-NEC forms, which document how much you received in payments from other businesses throughout the year.
The 1099-MISC (MISC stands for miscellaneous income) forms are mostly out of the picture these days, but if your business received certain funds like a legal settlement or prize money from a company, you may receive one.
You should get a Form 1099-K in the mail if you use a service that processes credit or debit card transactions — and if it has processed at least $20,000 worth of payments and at least 200 transactions for you in the previous year.
Lisa Greene-Lewis, a certified public accountant and TurboTax spokesperson, says that even if you don’t receive 1099s, “it’s important to keep careful records and track all income under these limits, as you still need to report all income regardless of whether or not you received the forms.”
There may be a lot to collect, depending on your line of work. You may have expenses, such as computer equipment or printer ink. You might drive a lot and need to track your mileage. And you might be able able to deduct medical expenses.
“And don’t forget about the home office deduction, which is one of the biggest deductions for the self-employed since it is a portion of your expenses like your rent, mortgage interest, property taxes and utilities based on the percentage of space you use for you home office,” Greene-Lewis says.
“Employees have limits to what expenses they can deduct, but if you’re an independent contractor or freelancer, you can deduct many business expenses. For a Lyft or Uber driver, for example, this might include gas, parking fees, car maintenance and repairs, auto insurance and any other expenses you incur for your car,” says Joshua Zimmelman, president of Westwood Tax & Consulting LLC in Rockville Centre, New York.
Calculate Your Taxes
If you don’t want to use tax preparation software or hire a tax professional, you can calculate your self-employment taxes.
Add up all the income you earned in 2023, which will be on those 1099-NEC forms and maybe a 1099-K or possibly a 1099-MISC form. Then subtract your business expenses.
Typically, 92.35% of your net earnings from self-employment is subject to self-employment tax. To make sure you’re on the right track, you may want to check out the IRS’s instructions regarding Schedule SE, which will help you figure out you tax due on your net earnings.
Next, apply the 15.3% tax rate to the amount subject to the self-employment tax. Then, divide the number by four to arrive at the amount you should pay the IRS every quarter. (Remember that you can deduct one-half of the self-employment tax you paid on your tax return each year.)
There are plenty of self-employment tax calculators online, including one from TaxOutReach.org, and the IRS provides resources on calculating self-employment tax, including an IRS worksheet to calculate your taxes.
File Your Taxes or Send Them to a Professional
Whatever you do, file your taxes by the April 15 deadline, and consider asking a professional to do it.
Keep in mind, however, that if you wait until the last minute to contact a professional to file your taxes, they’ll probably end up filing an extension for you since they are typically slammed right before the due date.
Plan for Next Year’s Self-Employment Taxes
Start preparing now for the taxes you’ll need to file in 2025. For starters, make sure to pay your quarterly self-employment taxes this year.
“Each year, a few new clients come to me with issues from self-employment. The most common is failure to pay estimated taxes,” Logan says.
“Self-employed people must pay their federal income tax, their state income tax — if any — and their Social Security and Medicare contributions,” she says.
That adds up. “When you include self-employment tax, federal income tax and state income tax, the amount owed can easily be 25% to 40%, even for middle-income Americans,” Logan adds.
If you aren’t ready for that, she says, it can be pretty shocking to find out what you owe the IRS.
What’s New for 2024 Self-Employment Taxes?
Tax regulations change every year, whether you’re self-employed or working for somebody else. Here are two changes for 2024 in self-employment taxes you need to know about:
— Business expense documentation for driving: Logan says that the mileage rate for 2023 was 65.5 cents (it generally goes up every year), and in 2024, it’s 67 cents.
— Form 1099-K: If as a self-employed person, you receive a fair amount of your income from credit or debit card payments from customers or clients, pay attention.
Sharon Lassar, a professor and director of the School of Accountancy at the University of Denver’s Daniels College of Business explains that the American Rescue Plan of 2021 changed the reporting threshold for third-party settlement organizations (TPSOs), including payment apps and online third-party settlement organizations.
“The new threshold requires reporting of transactions in excess of $600 per year, changed from the previous threshold of an excess of 200 transactions per year and an excess of $20,000,” Lassar says.
The law was going to go into effect for 2022, but then the IRS delayed its reporting requirements to 2023. Then, in late 2023, the IRS decided to delay the implementation for another year.
“The IRS will be phasing in the new requirements, starting with $5,000 threshold in 2024 and then reducing it to $600,” Logan says, adding that some states already require the 1099-K form for amounts of $600 or more.
TPSOs are required to report payments for goods and services. The law is not intended to track personal transactions like sharing the cost of a ride or meal, giving birthday or holiday gifts or paying a family member for a household bill, Lassar says.
“However, it may be difficult for a TPSO to appropriately separate personal from business transactions with 100% accuracy. It is wise, therefore, for individuals to use separate accounts for their business and personal activities,” she adds.
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How to File Taxes When You’re Self-Employed originally appeared on usnews.com
Update 01/10/24: This story was published at an earlier date and has been updated with new information.
