When you’re self-employed, paying taxes is a little more involved than when you’re an employee. In addition to paying your state and federal income taxes, you’re responsible for paying Social Security and Medicare taxes.
To comply with federal law, you’ll need to file the appropriate self-employment tax forms — IRS Form 1040, 1040 Schedule C and Schedule SE; and, depending on your situation, you’ll also need to pay self-employment tax throughout the year.
Here’s what you need to know about filing taxes as a self-employed person.
Who Qualifies 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, you must file a self-employed tax return:
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You carry on a trade or business as a member of a partnership.
- You’re otherwise in business — including a part-time business — for yourself.
Perhaps you work full-time and do a little freelance on the side — does that mean you’re self-employed? Yes; according to the IRS, you qualify as self-employed.
What Taxes Do I Pay If I’m Self-Employed?
One of the benefits of working for a company is that your employer pays Social Security and Medicare taxes. When you’re self-employed, however, these taxes are your responsibility.
The current self-employment tax rate is 12.4 percent for Social Security, which is your old age, survivors and disability insurance, and 2.9 percent for Medicare, which is your hospital insurance for when you retire. These taxes are separate from your income tax — but as a self-employed worker, you can take some special deductions that will reduce your tax burden. If you’ve worked as an independent contractor, your clients should send you the independent contractor tax form, Form 1099-MISC.
Self-Employment Tax Deductions
The benefit of paying self-employment taxes is that you can take advantage of a number of tax deductions to help reduce your tax burden. A few common deductions that self-employed individuals are entitled to 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 typically amounts to 50 to 57 percent 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 could qualify for other deductions or tax credits, too. For example, you might be able to deduct other types of insurance premiums, such as credit, liability or car insurance if it relates to your business. And if you work from home, you could be eligible to deduct a portion of your rent or mortgage if you have a dedicated work space.
How to File Self-Employment Taxes
If you’re new to filing self-employment taxes, finding the correct tax return forms can seem daunting. GOBankingRates identified the three forms most freelancers will likely need to file:
- IRS Form 1040: You must use tax Form 1040 if you are self-employed because it accounts for the self-employment tax.
- 1040 Schedule C: Use Schedule C to report your income or losses from a business you operated or a profession you practiced as a sole proprietor or freelancer. You might be able to use Schedule C-EZ if you have accrued expenses of $5,000 or less.
- Schedule SE: To report your Social Security and Medicare taxes, use Schedule SE Form 1040. Use the income or loss you determined on the Schedule C Form to calculate the self-employment taxes you’ll pay during the upcoming year.
How to Pay Self-Employment Taxes
You might need to make quarterly tax payments — also known as estimated taxes — on your income throughout the year. According to the IRS rules, in most cases, you’ll need to pay estimated federal taxes if both of the following apply:
- 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 on your 2017 tax return or 100 percent of the tax on your 2016 tax return.
To find out how much you need to save for self-employment taxes, use a self-employment tax estimator calculator, which you can find by conducting a quick internet search. Saving money now for use later is a smart tax move to make because you don’t want a nasty surprise each quarter.
If you don’t pay your estimated taxes in a lump sum in the first quarter, you can pay with vouchers that include each quarterly due date. You’ll find the vouchers included in Form 1040-ES. The due dates for quarterly taxes for tax year 2017 are:
- April 18, 2017
- June 15, 2017
- Sept. 15, 2017
- Jan. 16, 2018
You can pay estimated taxes online through the electronic federal tax payment system: It’s easy and all you need is your bank account information and debit card or credit card. You can skip the Jan. 16, 2018, payment if you put “file tax return early” on your to-do list. Just make sure you file for 2017 — and pay any balance you owe — by Jan. 31, 2018.
Consider Getting Help With Filing
Filing for self-employment taxes initially can be a little overwhelming. 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. Bonus: The fees you pay a tax accountant are usually tax-deductible.
Cynthia Measom contributed to the reporting for this article.