Key Takeaways
- If you’re self-employed, you must manage your own tax payments since there's no employer to withhold taxes from your paycheck.
- You need to keep accurate records of your income and expenses to calculate your net profit, which is typically reported on Schedule C (or Schedule F for farmers) and included in your personal income tax return.
- In addition to income taxes, you are required to pay both the employee and employer portions of Social Security and Medicare taxes on applicable earnings, totaling 15.3%.
- It's usually necessary to make estimated tax payments throughout the year since you don't have taxes withheld from a paycheck.
Self-employment taxes
Self-employed people are responsible for paying the same federal income taxes as everyone else. The difference is that they don't have an employer to withhold money from their paycheck and send it to the IRS—or to share the burden of paying Social Security and Medicare taxes. Self-employed people must keep track of their own income, estimate how much tax they owe, and in most cases, makes estimated tax payments throughout the year.
Calculating self-employment income
When you work for someone else, you get a W-2 form from your employer at the end of the year telling you exactly how much money you made. When you're self-employed, you have to figure that out yourself. That means you must keep accurate records of how much money you earn for the work you do and how much you spend to operate your business.
This record keeping is solely your responsibility—after all, you're the boss. At tax time, use Schedule C to report your business income and expenses. Subtract the expenses from the income to get your net profit from self-employment. Your net profit is then included on your personal income tax return and taxed in the same way as your other income. If you do work as an independent contractor, you can expect to receive 1099 forms from your clients, reporting the amounts they paid you during the year.
TurboTax Tip:
An alternative to making estimated tax payments is to increase federal tax withholding at a regular job, if you have one, to cover your self-employment taxes.
Self-employment taxes
In addition to income taxes, everyone must pay Social Security and Medicare taxes. If you are self-employed you need to make these tax payments yourself since you don’t have an employer to send it in for you. Employees pay 7.65 percent of their income in Social Security and Medicare taxes with their employers making an additional payment of 7.65 percent. The Social Security portion of the tax is paid on the first $168,600 of employment income in 2024.
Unfortunately, when you are self-employed you pay both portions of these taxes—for a total of 15.3 percent. However, you get to claim a deduction for a portion of this when you file your tax return. You calculate these employment taxes on a Schedule SE attachment to your personal tax return.
Estimating your income tax
When you're an employee, your employer withholds money for federal taxes out of your paychecks and sends the money to the IRS, so that by the end of the year, your anticipated tax bill should already be substantially paid. If you're self-employed, however, this is another task you have to take care of yourself.
Rather than paying weekly, you must make four estimated tax payments during the year. Because you're doing this while the tax year is in progress, all you can do is provide your best estimate based on the income you earn and recent tax rates.
Alternatives to estimated tax payments
If you have a "regular job" in addition to your self-employment, you may be able to increase your federal tax withholding at that job to cover the taxes on your self-employment income. If you can do so, you won't have to pay estimated taxes. However, if you still owe at least $1,000 even after increasing your withholding, then you must make some estimated tax payments. By year's end, your estimated payments (including employer withholding) must equal at least 90 percent of your tax liability for the current year or 100 percent of your tax liability from last year. If it doesn’t, you may be subject to an estimated tax penalty.
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