Key Takeaways
- If you switched from being employed by someone else to being self-employed during the tax year, your former employer will likely report your employee income to you and the IRS on Form W-2
- Your customers may report payments to you on a 1099-NEC form. You are required to report all income you received, whether it is reported on form 1099-NEC or not.
- As a self-employed individual, you are responsible for both the employer and employee portions of your Social Security and Medicare taxes. This is the self-employment tax.
- Quarterly estimated payments can help you avoid penalties for the timely payment of your income and self-employment taxes. They’re due on April 15, June 15, September 15 of the current year and January 15 of the following year or the next business day if the due date falls on a weekend or holiday.
Receiving W-2 and 1099 Tax Forms
If you were employed for part of the year, your employer will likely report your employee income to you and the Internal Revenue Service (IRS) on Form W-2. In addition, you may also receive self-employment income that your customers reported to the IRS on a 1099-NEC form (1099-MISC in prior years). And, you may have income collected from customers that does not get reported on a 1099-NEC form. If you receive payments through third-party payment processors such as PayPal, you might receive a 1099-K. Payers will also send these forms to the IRS to report your income, so it is important to include all of your income on your tax return.
The IRS is gradually phasing in new 1099-K reporting requirements for payments from third-party processors like Venmo and Paypal. In 2021, Congress changed the reporting threshold from over $20,000 in payments and more than 200 transactions to over $600 in payments regardless of the number of transactions. But instead of using the new $600 threshold right away, the IRS applied the previous reporting threshold for the 2022 and 2023 tax years. For the 2024 tax year, the IRS plans to use a $5,000 threshold, regardless of the number of transactions. The tax agency hasn’t announced its plans for after 2024 yet. On the other hand, some states have already started using the $600 threshold for their own reporting requirements.
Self-Employment Tax
When you work for someone else, you pay half your Medicare and Social Security taxes, and your employer pays the other half. These are sometimes referred to as payroll taxes.
When you’re self-employed, you are responsible for paying all the payroll tax yourself - both the employee and employer portions - on the net income earned from your business. This is the self-employment tax. You can calculate it on IRS Schedule SE and include the form with your tax return.
The good news is, your employer has already withheld payroll taxes for the income reported on your W-2 form. However, you’ll have to pay the self-employment tax yourself on your self-employed income.
TurboTax Tip:
Your self-employment is typically considered a business, so you can use Schedule C to list not only your business income, but also to deduct all of your business expenses you’re entitled to.
Paying Quarterly Estimated Taxes
You shouldn’t wait until the end of the year to pay your self-employment tax and income tax on your business income, or else you might owe interest and penalties. The IRS wants you to estimate your taxes and pay as you go, four times a year. You can complete IRS Form 1040-ES to estimate how much you’ll owe for each quarter of the year.
When you first start your business or work as self-employed, you’ll have to make an educated guess about how much income you will earn over the tax year, because you won’t have any previous years’ income to guide you. If your estimate is wrong—either too low or too high—you can adjust the amount on your 1040-ES forms during the tax year.
The important thing is that you begin making quarterly payments as soon as you begin making money as a self-employed person. They’re due on April 15, June 15, September 15 of the current year and January 15 of the following year or the next business day if the due date falls on a weekend or holiday.
Completing IRS Schedule C
Schedule C is used to calculate your business income for the portion of the year that you were self-employed—all the income your business took in, less business expenses. The resulting number is what you’ll use to calculate your self-employment tax on Schedule SE and what you’ll report on your Form 1040 as income.
Reporting All Income
You must report all your sources of income to the IRS on your tax return, even if you don’t receive a 1099 form from your customers. If you were close in estimating what you would owe when you completed Form 1040-ES and made those quarterly payments on time, you shouldn't owe the IRS much (if any) additional tax.
Always go back over your tax return to make sure that you have included all of your income and deducted every business expense you were entitled to. Look for differences between your estimated expenses at the time you completed Form 1040-ES and what they actually turned out to be. If you were wrong in your forecast for either income or expenses, you can adjust your estimated tax payments going forward into the new year.
Likewise, if the W-4 form you completed for your employer was accurate, you won’t owe anything on the income reported on your W-2 either.
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