How To File Self-Employment Taxes: A Step-By-Step Guide

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When you’re self-employed, paying taxes is a little more involved than merely doing your income tax filing once a year as you do when you’re an employee. You’ll need to file the appropriate self-employment tax forms and, depending on your situation, pay self-employment tax quarterly, throughout the year. For example, first-quarter estimated self-employment taxes are due on April 15, second-quarter taxes are due on June 15, third-quarter taxes on September 15 and fourth-quarter taxes are due on January 15 of the following year. Here’s what you need to know about filing taxes as a self-employed person.

1. Determine If You Qualify as Self-Employed

If you own a small business or work as a freelancer, Uncle Sam considers you self-employed. IRS rules state that if one of the following three situations applies to you, then you’re self-employed:

  • You carry on a trade or business as a sole proprietorship or as an independent contractor.
  • You’re a member of a partnership that carries on a trade or business.
  • You’re otherwise in business — including a part-time business or gig work — for yourself.

And generally, if you do some freelance moonlighting outside of your salaried job, you still qualify as self-employed.

2. Compile Your Earnings Statements

If you have performed services worth $600 or more for a client, you should receive a Form 1099-NEC from them. Or, if you’re paid via a third-party payment processor, such as PayPal, and received at least 200 payments totaling more than $20,000 in 2022 ($600 in payments regardless of the number of transactions in 2023 and beyond), you should receive a 1099-K from the payment processor.

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These forms should be filed by Jan. 31. Once you receive all of your 1099-NEC and 1099-K forms, tally up the total payments so you know exactly how much you earned for the year.

3. Gather Your Receipts and Invoices

If you are self-employed, you should keep supporting documents for all of your business transactions for the year. In addition to all of your 1099-NEC and 1099-K forms, keep sales slips, paid bills, invoices, receipts, deposit slips and canceled checks. Gather documents that show proof of purchases and expenses, including business-related travel, transportation, entertainment and gifts.

4. Calculate If You Made Enough To File

If your net earnings from self-employment were $400 or more, you are required to file an income tax return. If you earned less than $400, you might still have to file a return if any of the following applies to you, according to the IRS:

  • You owe any special taxes, such as alternative minimum tax.
  • You (or your spouse, if filing jointly) received health savings account, Archer MSA or Medicare Advantage MSA distributions.
  • You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer Social Security and Medicare taxes.
  • Advance payments of the premium tax credit were made for you, your spouse or a dependent who enrolled in coverage through the marketplace.
  • You are required to include amounts in income under section 965 or you have a net tax liability under section 965 that you are paying in installments under section 965(h) or deferred by making an election under section 965(i).

5. Use the Correct Form

If you’re new to filing self-employment or independent contractor taxes, finding the correct self-employment tax form can seem daunting, but most freelancers will likely only need these three forms:

  • Form 1040: Form 1040 is the individual tax return form where you’ll report net earnings from self employment and indicate how much tax you owe or the refund amount you’re due. You’ll use the other forms listed here to calculate the various figures that must be entered on the 1040.
  • Schedule C: On Schedule C, report your profit or losses from a business you operated or a profession you practiced as a sole proprietor or freelancer. If you accrued expenses of $5,000 or less, you might be eligible for the Schedule C-EZ short form.
  • Schedule SE: On Schedule SE for Form 1040, you report Social Security and Medicare taxes — i.e., your self-employment tax — due. The net profit or loss you determined on Schedule C or Schedule C-EZ is used to calculate your self-employment tax liability.
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6. Complete and File Your Self-Employment Taxes

You might need to make quarterly payments on your income throughout the year, also known as estimated taxes. According to the IRS rules, in most cases, you’ll need to pay estimated federal taxes if the following apply:

  • You expect to owe at least $1,000 in taxes when your return is filed, after subtracting your withholdings and credits.
  • If your tax was greater than zero in the previous year, you might have to pay estimated taxes for the current year.

Generally, you can avoid a penalty for underpayment if you paid 90% or more of the tax for the current year or all of the tax shown on your return for the previous year, whichever is smaller, according to the IRS.

If you don’t pay your estimated taxes in one lump sum in the first quarter, you can pay your estimated taxes with vouchers found on Form 1040-ES that include each quarterly due date.

You can also pay estimated taxes and file self-employment taxes online through the Electronic Federal Tax Payment System with your bank account information or pay by debit card or credit card through an IRS-approved service provider.

What Taxes Do I Pay If I’m Self-Employed?

One of the benefits of working for a company is that both you and your employer pay Social Security and Medicare taxes. When you’re self-employed, however, these taxes are your responsibility alone.

The current self-employment tax rate is 12.4% for Social Security, which is your Old-Age, Survivors and Disability Insurance, and 2.9% for Medicare, which is your medical insurance in retirement. These taxes are separate from your income tax. 

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Deductions for Self-Employed Individuals

The benefit of paying self-employment taxes is that you can take advantage of many self-employment tax deductions to help reduce your tax burden. A few common deductions for those filing self-employment taxes include: 

  • Self-employed SEP, SIMPLE and qualified plans: For self-employed workers who contributed to retirement plans in the tax year
  • Part of your self-employment tax: Reduces your adjusted gross income and is typically 50% of your self-employment tax
  • Self-employed health insurance deduction: Might allow you to deduct the amount paid for health insurance for yourself, your spouse and your dependents

You might be able to qualify for other deductions or tax credits, too. For instance, if you work from home, you could be eligible to deduct expenses of your home office.

If you’ve never filed self-employment taxes before, it can be a little overwhelming. So, if you’re unsure about whether you’re doing it correctly, paying enough or getting every deduction you qualify for, it might be a good idea to hire an accountant.

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Daria Uhlig and Gabrielle Olya contributed to the reporting for this article.

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