How to File Self Employment Taxes

The many different Types of self employment jobs have quite a range. There are dog walkers and accountants, landscapers and delivery drivers.

There are self-employed jobs that are so much fun, they don’t feel like work. Often that happens when a hobby becomes a career.

No matter what type of work is done, all self-employed taxpayers have one thing in common: They pay taxes. They pay income tax and self-employment tax.

As a self employed person, you can file self employment income taxes yourself. You can get the paperwork needed from the internet and do it yourself, or you can use tax software for small business owners. Or you can hire a tax professional.

Remember this is federal income tax. You’ll also owe state income tax.

What’s the Difference Between Income Tax and Self Employment Tax?

Income taxes are the taxes you pay based on your net earnings. Self employment taxes are additional taxes paid by self employed individuals.

What are Self Employment Taxes?

Self employed individuals pay social security and medicare taxes, in addition to income tax. Employers take those taxes out when they do payroll. Since you don’t have an employer, you are responsible for paying self employment taxes.

How Much are Self Employment Taxes?

The self employment tax for social security and medicare is 15.3%. Of that, 12.4% goes to social security tax and the medicare tax is 2.9%.

That’s the total for social security and medicare taxes if you’re single and make a net income under $200,000. If you’re single and make more than $200,000 (congratulations, by the way), the medicare tax will be another 9% (3.8% total). There are various calculations based on your marital status and earnings from self employment.

Your taxable income is your net earnings, not the total of your business income.

Additional Medicare Taxes for Self Employed Professionals

Although the social security tax remains standard, the medicare tax can vary according to your marital status and amount of net earnings from self employment.

When do You Have to Pay Self Employment Tax?

Self employment taxes and income taxes should be made by quarterly estimated tax payments.

For quarterly estimated payments you use IRS form 1040-ES, Estimated tax for individuals, which include blank vouchers you can print. Or you can file electronically using the Electronic Federal Tax Payment System.

Self employed people will still file annual taxes. That’s when you’ll use IRS Form 1040 paired with IRS Schedule C, where you’ll fill in information used to calculate your profit or loss. Your tax liability may be more or less, depending on whether you’ve over or underestimated your quarterly estimated taxes.

The deadline for filing annually for a self employed individual is the same as everybody’s else’s federal income taxes return deadline, except for a deferral allowed by the CARES Act (see below).

Self Employment Tax Deferral

Through the CARES Act, workers could defer self employment taxes that were due in 2020. Half of the self employment taxes due in 2020 were to be paid by the end of tax year 2021, with the remaining half paid by the end of tax year 2022.

How to File Your Self Employment Taxes

As an independent contractor/self employment individual, you have to keep good records to aid in tax preparation.

Even more importantly for the ease in completing your tax return, you have to know where they are.

Before you start your federal income tax return, gather all the supporting documentation you need to support business expenses and gross income. You’ll need those items to calculate your net earnings from self employment. You’ll also need the documentation from your quarterly estimated taxes that you paid, based on your predictions for gross income and expenses on your estimated income tax payments.

Filling Out Your Self Employment Tax Form

Since your self employment tax is based on your net earnings from self employment, the first thing you need to do is fill out your Schedule C.

Schedule C: Profit and Loss Statement for Self Employed

This is the form where you record your business expenses, such as what you spent for travel, education and certifications, office equipment and supplies, materials and similar. Your expenses will be specific to the type of work you do as an independent contractor/self employed person.

You’ll add up your total income and the total of your expenses. The different between the two is either profit or loss applied to your tax bill.

It’s important to keep the standard deduction in mind as you add up deductions. The standard deduction is $12,550. If your deductions will be less than that amount, you’ll just use the standard deduction.

1040 Self Employed

This form includes your general information, such as address and social security number. People who receive a W2 use the straight 1040. You’ll use the 1040 SE, which has a place for you to record the bottom line from your Schedule C.

Once you’ve completed those forms for your tax return, you’ll have the number for your net earnings from self employment. You’ll use that number to calculate your self employment tax, including social security and medicare taxes. When you pay estimated taxes, you’ll also include that information.

Self Employed W2

Sometimes self employed people receive a W2 from an employer who didn’t withhold payroll taxes. In that case on your tax return you must pay the income tax due, as well as the self employment tax for social security and medicare.

Self Employment Tax Deductions

If you run your own business, you’ll quickly get savvy about what you can use for a qualified business income deduction. Your self employment earnings number will be reduced by any income tax deduction, such as:

Purchase of computer, laptop, printer and software for the business

Office Supplies

Travel such as airfare and vehicle mileage (keep records)

Advertising costs

Depreciation of equipment

Education and certifications

What about the home office deduction? Tax professionals often advise against using this deduction. It’s often stated that using the home office deduction makes it more likely that you’ll be audited by the IRS.

Is that true? What matters is that as long as you have accurate, provable records the home office deduction may work for you. For example, you have a dedicated office room, separate business and internet phone line, etc. Before you use this deduction, you may want to get tax advice from a tax preparation professional.

Also, doing itemized deductions doesn’t always make sense. The annual standard deduction for a single filer was raised to $12,550. If your deductions won’t be higher than that amount, just use the standard deduction. The standard deduction may even get you a higher tax refund.

Self Employed Health Insurance Deduction

You can deduct the cost of your health insurance premiums as tax deductions as you’re calculating your net earnings.

Tax Write Offs for Self Employed

The best tax write off for a self employed individual is a retirement plan. Money contributed to a retirement plan is deducted from your gross earnings – then called adjusted gross income. Your level of income affects your tax rate, and your tax rate impacts how much you pay as a self employed business owner.

For example, if you earn $32,000 gross from self employment and contribute $6,000 (the annual limit, although you can contribute $7,000 the first year) to an IRA, your adjusted gross income is $26,000. That will change how much you pay to social security and medicare, and may help you get a tax refund. Such contributions are also one way to offset capital gains.

Remember, if money isn’t taxed when it goes in, it will be taxed when it is withdrawn.

You have two main choices:

IRA (Individual Retirement Account) – An IRA can be a traditional IRA (no taxes taken out as money is contributed) or Roth IRA (monies are taxed before contributed). You may want to get professional tax advice to determine which type works best for you.

401K – Monies contributed are pre-taxed. You can set up a 401K for your business and even do so for employees, if you have them. A tax professional can help with those decisions.

How to Pay Self Employment Tax

Calculate your total self employment tax based on your net earnings. Once you have the annual total of what you owe according to social security and medicare taxes withheld when you made quarterly payments, figure the difference.

Then, based on net profit and previous quarterly payments, calculate your self employment taxes owed.

If you owe, you’ll be able to print a payment voucher from Schedule 1040 SE and send a check. Or you can pay electronically.

How to Report Self Employment Income Without a 1099

Many independent contractors don’t receive a 1099. Instead, their clients pay them by check, payment App or other method.

During the year, you should record and tally payments made to you. As independent wage earners, you should have a business bank account. Using deposit records made to the business account, it should be easy to feed the deposit information (as income) into your tax preparation software or tax paperwork.

You will always need documentation to support the numbers you use on your tax return. Having a record of deposits makes that easier.

You should also have a dedicated credit card for your business. If you use the credit card for all or for the bulk of your purchases and expenses, tax time could be a breeze.

And in the meantime, depending on which card you choose, you can be earning points rewards or cash back on your expenditures.

Do I need to pay self employment taxes?

Yes, without a doubt.

What happens if you don’t pay self employment tax on time?

If you don’t pay on time, the IRS will charge you a penalty. The penalty will be 2.66% on the amount owed. That percentage will be applied monthly to the growing total.

What Is the Federal Self Employment Tax Rate?

The self employment tax rate is 15.3% (12.4 for SS and 2.9 for medicare).

With traditional employment taxes, the employer pays half of that (7.65%) and the employee is charged half (taken out of the paycheck). Since you don’t have an employer, the 7.65% amount can be used as a tax deduction.

Is Disability Insurance for Self Employment Tax Deductible?

No, the amount you pay for disability insurance is NOT tax deductible. That doesn’t mean you should go without it. In fact, disability insurance is relatively inexpensive, especially in comparison to the difference it will make for you should you become injured in some way, and unable to work.

However, you should be able to deduct dental, vision and medical expenses if you spend more than your adjusted gross income.

For example, let’s say you earned $40,000 gross last year. You contributed $6,000 to an IRA, bringing the adjustment to $34,000.

You may have affordable health insurance, but a high deductible that you paid out of pocket. Or you may not have vision or dental insurance. What if you needed two root canals, and paid more than $5,000 total for both? In the example, that’s more than 7.5% ($4,533) of the AGI.

You may be able to deduct those costs. Of course, you’ll need documentation including bills and records of your payments. If you had multiple medical expenses, it may be time to use a tax professional, or tax software that includes professional assistance.

What is the difference between self employment tax and income tax?

Let’s review. As you now know, the two are related – and you can’t have one without the other.

In short, if you’re self employed use Schedule C to calculate deductions (if you’ll have more than $12,500). If not, use the standard deduction.

Make quarterly payments for the se tax, based on your best estimates. When you do the annual filing, use your net income earnings to see how much se tax you owe based on that figure. Using the totals from your quarterly payments, subtract what you’ve already paid. Make a payment for the remainder.

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This article, "How to File Self Employment Taxes" was first published on Small Business Trends