Self-Employment Taxes: What You Need to Know and How to Stay on Top of Them with Confidence

Being your own boss comes with many benefits, like greater flexibility, freedom, and control over your work. However, when it comes to taxes, being self-employed can feel like a whole new ballgame.

Navigating the process of self-employment taxes, including what they are, who needs to pay them, and when they’re due, can be tricky and overwhelming. In this article, we’ll explore everything you need to know about self-employment taxes and how to stay on top of them, so you can keep your finances in order and maximize your tax refund.

What SaverLife has learned from self-employed members

  • 71% of members who own small businesses carefully track their business expenses
  • 64% of members with gig work or a side hustle carefully track their business expenses
  • 54% of members who own small businesses write off their business expenses on their tax returns
  • 42% of members with gig work or a side hustle write off their business expenses on their tax returns

SaverLife’s research highlights that there are more opportunities for self-employed members to maximize their tax returns when they monitor and write off their expenses. But this is only part of the filing experience. If you’re self-employed, you also need to stay on top of any tax obligations that could impact when and how you file — and how much money you get back as a tax refund.

Read on to learn more about self-employment-related taxes and how you can set yourself and your work up for success.

How to tell if you’re self-employed

Not sure if you’re considered self-employed?

Here are two definitions to help you determine your standing: 

  1. If you primarily receive your paychecks from an established business or employer, and this is your only source of income, you aren’t self-employed.
  2. But if you operate a business as a sole owner, are part of a business partnership, or take on work as an independent contractor, you’re self-employed. This includes individuals working for themselves in the gig economy and those who work for themselves part time.

Think of it like this: if some or all of your income comes from your entrepreneurship, gig work, or a side hustle, you fall under the “self-employed” category. Some examples of this can include:

  • Makeup artists
  • Delivery drivers
  • Social media influencers
  • Tax preparers
  • Freelance writers

If you identify as self-employed by these definitions, it’s important to understand your tax obligations so you file your tax returns correctly and maximize your refund. 

What is the self-employment tax?

One major tax obligation to keep in mind is the self-employment (SE) tax.

When you work for an employer, they take taxes known as FICA out of your paycheck. FICA taxes are automatically deducted from your paycheck, and they go toward your Social Security and Medicare. 

But when you’re self-employed, no one takes these taxes out of your paycheck for you. You’re responsible for paying the SE tax and making contributions to your Social Security and Medicare. 

One important note to keep in mind about the SE tax is that while you’re responsible for paying the whole estimated amount when it’s due, you can deduct half of the amount paid on your 1040 form when you file your taxes. So, if you pay $1,000 in self-employment tax, you’ll be able to deduct $500 when you file your taxes.

How to determine if you owe self-employment tax and income tax

In addition to paying the SE tax, as a self-employed individual you’re also responsible for paying income tax on the income you earn.

Income tax will be paid at the rate determined by your ordinary income tax bracket and filing status.

To determine whether you owe self-employment tax and income tax, you’ll need to find your net profit. You can do this by subtracting your business expenses from your business income. If the number is greater than zero, you have a positive net profit, and this is reported as income on your taxes. If the number you get is less than zero, this is a net loss. You can usually deduct a net loss from your gross income. 

If the net income earned from your business is $400 or more, you will need to file a tax return. If your net income from your business is less than $400, you most likely won’t need to file a tax return. However, you may still need to file if you meet the filing requirements on either the 1040 or 1040-SR tax forms.

If you’re self-employed, you may pay taxes throughout the year

Because you don’t have an employer withholding social security and Medicare taxes for you, the federal government has created a system for you to pay these taxes throughout the year. This is the Estimated Quarterly Payment system.

With estimated quarterly payments, you’ll submit a tax payment estimate each quarter on:

  • April 15
  • June 15
  • September 15
  • January 15

When you prepare your taxes for the calendar year, your estimated payments will be compared to your tax liability. If you’ve overpaid, you’ll receive a tax refund. If you’ve underpaid, you’ll pay the remaining balance when you file your taxes. 

To send in your estimated quarterly taxes, use tax form 1040-ES. This form has a worksheet like the 1040 that will help you use your tax information from the prior year to estimate what you owe. You can also use accounting software to determine your estimated payments.

Once you’ve calculated your estimated quarterly payments, you can submit them as a check in the mail. You can also register to pay your estimated taxes online. Most states have their own estimated payment system that you can use to process your payments.

Paying estimated quarterly taxes is a good idea for anyone who is self-employed. It helps spread out the cost of your taxes throughout the year, and it ensures you meet your tax obligations. According to the IRS, individuals who are self-employed and expect to owe more than $1,000 in taxes at the end of the year are required to make estimated quarterly payments. 

To learn more about filing SE and income taxes, check out the IRS website for information and resources to make sure you’re on the right track.

How to budget for quarterly tax payments

Paying your taxes throughout the year can help you plan for the short- and long-term future of your small business, side hustle, or gig work.

To budget for each quarterly payment, try setting aside 30-35% of your income for taxes in advance.

For example, if your business makes a $1,500 profit in one month, you’ll want to set aside $450-$525 in a separate account to pay your taxes when they’re due. Setting aside the money as it comes in means that you’ll be prepared when tax payments are due.

After a year of setting aside a certain percentage for your estimated taxes, you can compare what you owe to what was put aside and adjust the percentage you save each month. 

For more information and support, visit the IRS Small Business and Self-Employed Tax Center.

The SaverLife community is here for you

Dealing with self-employment taxes can be a daunting task, and it’s completely normal to feel overwhelmed. It will get easier the more you do it, but in the meantime, it’s important to remember that you’re not in this alone.

There are thousands of other self-employed SaverLife members who are navigating their business taxes, too. Reach out to them today through our member forum to share your experiences and get your most burning self-employment questions answered.

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