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How to file self-employment taxes — step by step

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By Next Insurance Staff
Jan 28, 2020 min read

Filing taxes as a self-employed person may seem more complicated that when you were an employee. 

There's no human resources department to make the calculation for you. There's no payroll team to deduct the right amount off your paychecks. The responsibility falls on your shoulders to satisfy the IRS. 

But that responsibility comes with opportunity. Think of it as another motivation to develop sound business practices. Those practices help you to manage your cash flow so you can make timely and accurate self employed income tax payments. 

In order to develop strong financial practices, it is key to know your self employment tax rate, how to file self-employment taxes, and when you have to remit.

Here's an overview of what you need to know.

Taxes you pay on self-employment earnings

At first, it may seem like you pay more on your self-employment earnings than you would as an employee. That's because you pay both income tax and self-employment tax.

However, self-employment tax — what the IRS abbreviates as "SE tax" — covers social security and medicare tax. So in reality you are paying close to what you would as an individual working for someone else. 

But "close to" is also an important qualification. In the case of employees, these taxes are split between the employee and employer. For self-employed individuals, you pay it all. 

So, how much is self employment tax? It depends on how much you make.

Here's what you may have to pay:

Self-employment tax: You pay this on 92.35 percent of your net earnings from self-employment. You do not have to claim self-employment income if your net earnings are less than $400.

You pay 12.4 percent for social security and 2.9 percent for Medicare. The amount of your earnings subject to social security is capped every year, and that amount varies annually. 

Additional medicare tax: You pay an additional 0.9 percent if your total income, including self-employment and non-self-employment income, is over $200,000 for a single person, $125,000 for a married person filing separately or $250,000 for a married person filing jointly. 

The self-employment taxes are included in your tax return, and are not exhaustive of the overall tax you pay to the IRS. In addition, these are just federal taxes, and the total amount you pay depends on your self-employed tax deductions. You are also responsible for state taxes, licenses, fees, permits, and other charges levied by your region or municipality. 

How to Calculate Your Self-Employment Income

The IRS gives a simple explanation of how much you must claim. First, you have to determine the amount of your self-employment net profit or loss by subtracting your business expenses from your business income. If you have a profit of $400 or more, you must include that in your 1040 gross income. If you have a net loss, you may be able to deduct that loss. You can't deduct every loss, or for an unlimited amount, however.

The Basic Steps for Filing

At its most basic, here is how to file self employment taxes step by step.

  • Calculate your income and expenses. That is a list of the money you've made, less the amount you've spent. While you may have a 1099 form for some payments you've received as a contractor -- a 1099 is like a W-2 -- you may have to gather invoices for the rest.
  • Determine if you have a net profit or loss.
  • Fill out an information return. This is only required for certain types of payments or businesses. Visit the IRS website on information returns to see if it applies to you. 
  • Fill out a 1040,  and other self employment tax forms. These will include a Schedule C or Schedule C-EZ to report your income or loss. It will also include your Schedule SE (Form 1040), Self Employment Tax. 

Since the paperwork can be lengthy and complicated, it might be helpful to have an accountant review your documents before submission. 

Can You Use an Optional Method?

If your net self-employment earnings were less than $5,891 and those earnings accounted for no more than 72.189 percent of your gross overall income, you can use an optional method to calculate tax. The effects of this choice are outlined on the IRS' instructions for form Schedule SE.

Timing of Your Tax Payments

Another thing that works a bit differently is when you pay your taxes. Most business owners have to pay on a quarterly basis, estimating the amount they will owe throughout the year. You can use the IRS form 1040-ES to figure out your estimated tax payments. The form also has vouchers you can use to remit the amount owing to the agency. 

Staying Up-to-Date on Self-Employment Taxes

Knowing the nuts-and-bolts of how to pay self employment tax is one thing. Actually integrating that knowledge into the daily operations of your business can be quite different. Here are some useful tips:

Pay your taxes in full and on time. It is far better to feel the pain of taxes now than to put it off and end up with a huge bill from the IRS. 

Ask for help. An accountant for financial advisor can help relieve the burden. If you aren't clear how to estimate self employment taxes, partner with a professional who can show you how.

Include taxes in your budget. Set aside the amount of taxes you'll have to pay so the money is available when the bill is due. To be safe, budget for 25 to 40 percent of your quarterly profit. 

Keep all receipts from business-related expenses. The IRS lets you reduce self employment tax by deducting expenses. Keep track of everything you spend throughout the year. Deductible expenditures include business insurance, vehicle, and use of your home -- if they are legitimately part of your self employed expenses.

Minding the Details of Your Business

The good news about paying self-employment taxes is that it likely means you've made a profit on your business. To keep that positive aspect going, remember to mind all of the legal and administrative aspects of your operation. That means paying taxes, keeping your license and certifications up-to-date, understanding your contractual obligations to partners and clients, and holding business or contractors insurance to keep you protected.

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