Being self-employed can mean enjoying a great deal of freedom. But that freedom also means a lot of responsibility and accountability, especially when it comes to filing your income tax return. That’s because, if you’re self-employed, a business owner, or a freelancer, there’s no company or individual responsible for withholding taxes you owe the government — which means that, in addition to your income tax, you must pay self-employment tax.
Simply put, self-employment tax is the Social Security and Medicare tax that an employer would normally withhold if you were employed by them. In many cases, you’ll need to pay quarterly tax payments — known as estimated tax payments — throughout the year.
If you’re self-employed, you don’t get a W-2 from an employer but instead receive a 1099 tax form from any and all clients for whom you do work during the year. Your clients don’t withhold tax in their payments to you, and if they don’t send you a 1099, you still owe taxes for the money you earned from them.
According to the IRS, you are considered self-employed and must file a self-employed tax return if one of the following applies to you:
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You’re a member of a partnership that carries on a trade or business.
- You’re otherwise in business for yourself (including as a part-time business).
Whether you’re paying federal and state estimated tax payments or figuring out your quarterly tax payments, here’s everything you need to know.
Find Out: The Tax Penalty for Filing Late
How to Determine How Much Estimated Taxes to Pay
Because you’re in charge of paying estimated taxes, you’re also in charge of figuring out how much you owe and when you must pay it. So, first, determine if you even need to pay estimated quarterly taxes.
IRS Form 1040-ES for 2017 has been released and has the same rules as it did in 2016 for determining whether you should be paying estimated taxes. In most cases, you need to pay estimated taxes if both of the following apply:
- For 2016:
- You expect to owe at least $1,000 in taxes for 2016, after subtracting your withholding and refundable credits.
- You expect your withholding and refundable credits to be less than the smaller of: 90 percent of the tax to be shown on your 2016 tax return or 100 percent of the tax shown on your 2015 tax return.
- For 2017:
- You expect to owe at least $1,000 in taxes for 2017, after subtracting your withholding and refundable credits.
- You expect your withholding and refundable credits to be less than the smaller of: 90 percent of the tax to be shown on your 2017 tax return or 100 percent of the tax shown on your 2016 tax return.
Confused yet? Well, good news: The IRS has an estimated tax worksheet in the estimated tax form, Form 1040-ES. You’ll need your prior year’s tax returns to fill out the worksheet. In the worksheet, you’ll also find an estimated tax rate schedule of what you need to pay.
If you have a job that pays you a salary or wages — a job which withholds taxes and gives you a W-2 — there might be a way to increase your withholding through that employer to offset the self-employment taxes you owe through your self-employment or freelancing income.
Self-Employment Tax Forms You’ll Need
The first step in filing a self-employment tax return is choosing the right forms. Here are the self-employment forms you can expect to file if self-employed:
- Form 1040: This form is required for individuals who are self-employed because it accounts for the self-employment tax.
- Schedule C: This form allows you to report your income or loss from a business you operated or a profession you practiced as a sole proprietor. If you accrued expenses of $5,000 or less, you might be eligible for the Schedule C-EZ short form.
- Schedule SE (Form 1040): Schedule SE allows you to report your Social Security and Medicare taxes. The income or loss you calculated on Schedule C is used to calculate your self-employment taxes paid during the year.
Form 1040-ES contains four vouchers that you include with your four quarterly — or single lump — payments. As for when you need to make your quarterly payments, here are the deadlines:
- For 2016: You can pay for the entire year on April 18, 2016, or you can pay four quarterly installments of equal amounts on April 18, 2016; June 15, 2016; Sept. 15, 2016; and Jan. 17, 2017.
- For 2017: You can pay for the entire year on April 18, 2017, or you can pay four quarterly installments of equal amounts on April 18, 2017; June 15, 2017; Sept. 15, 2017; and Jan. 16, 2018. Note that you don’t have to make the payment due on Jan. 16, 2018, if you file your 2017 tax return by Jan. 31, 2018, and pay the entire balance due with your return, according to the IRS.
You can also pay estimated taxes online through the electronic federal tax payment system using your bank account information or a debit or credit card. Information on this can be found on Form 1040-ES, as well.
Self-Employment Tax Deductions and Credits
Like the rest of American taxpayers, you’ll want to take every tax deduction and tax credit you can to reduce your IRS tax liability. Tax deductions are write-offs that reduce your taxable income, whereas credits reduce your final tax bill.
As a person who is self-employed, there are a few deductions to look out for:
- Deductible part of self-employment tax: This deduction, which reduces your adjusted gross income, is typically 50 to 57 percent of your self-employment tax, according to TurboTax.
- Self-employed SEP, SIMPLE and qualified plans: This deduction accounts for self-employed workers who contributed to retirement plans in the tax year. It also reduces your AGI.
- Self-employed health insurance deduction: You might be able to deduct the amount paid for health insurance for yourself, your spouse and your dependents with this deduction.
You might also qualify for other deductions, such as a home office deduction for using a portion of your home for business. But as you crunch the numbers, you’ll find that taxes for self-employed workers can be pretty complicated. And when you throw into the equation other factors — like property ownership, stock investments, interest income, other businesses, or a possible qualification for paying the alternative minimum tax — things can get even more complex. So, don’t hesitate to call in a pro when figuring out your self-employment taxes.
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