What are the typical withholdings and basic tax rates?
Typically, an employer contributes 6.2% of your income (up to a maximum amount set by the IRS) toward Social Security and 1.45% toward Medicare. Through payroll withholdings, you also pay an additional 6.2% for Social Security and 1.45% for Medicare. Your employer deducts these amounts from your paycheck and forwards them, along with its own matching contribution, to the federal government.
When you are self-employed, you are responsible for both the employer and employee portions of these taxes. This means you pay 12.4% for Social Security and 2.9% for Medicare. If you earn more than a certain income threshold (for example, $200,000 if filing as single or $250,000 if married filing jointly), you may owe an additional 0.9% Medicare tax on earnings above that threshold.
Together, these taxes are known as the self-employment tax, and they are paid in addition to your regular federal and state income taxes. While these taxes are not considered deductible as business expenses, you may deduct half of your self-employment tax on your personal income tax return to help reduce your overall taxable income.
How do I determine the amount of tax I owe?
The self-employment tax is based on your net profit, not your gross income. To calculate this:
- Subtract your business expenses from your business income.
- If your expenses are lower than your income, you have a net profit and must pay self-employment tax on that amount.
- If your expenses are higher than your income, you have a net loss and may be able to deduct that loss from other income.
You calculate your self-employment tax using Schedule SE (Form 1040).
If you have a net loss, you’ll determine whether it is deductible by completing Schedule C (Profit or Loss From Business). In certain situations, nondeductible losses may be carried forward to future tax years. The IRS explains these rules in Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
How do I make my tax payments?
If you are self-employed, you generally must pay estimated taxes quarterly and file an annual return. Your quarterly payments should cover your expected:
- Social Security and Medicare (self-employment) taxes.
- Federal income tax obligation.
You can estimate and pay these taxes using Form 1040-ES, Estimated Tax for Individuals. The form includes payment vouchers, and you can also make payments electronically through the Electronic Federal Tax Payment System (EFTPS) or IRS Direct Pay.
Your estimated tax payments should roughly equal the tax you owed for the previous year or at least 90% of your current year’s tax to avoid underpayment penalties.
If you earn more than expected during the year, you may need to increase your estimated payments. Conversely, if you earn less, you can adjust future payments, though the IRS generally prefers consistency in quarterly payment amounts.
Each year, you’ll file:
- Schedule C (Form 1040) to report business income and expenses.
- Schedule SE (Form 1040) to calculate your self-employment tax.
Your annual income tax return (Form 1040) is generally due on the 15th day of the fourth month after the end of your tax year (typically April 15 for calendar-year filers). If that date falls on a weekend or holiday, the deadline shifts to the next business day.
A good practice is to set aside a portion of every payment you receive to cover your quarterly and annual tax obligations. This helps ensure you don’t face a large, unexpected bill at tax time.
How do I get help with my self-employment taxes?
Managing taxes as a self-employed person can be complex, especially if you are newly self-employed or considering forming an LLC or corporation. You can find official guidance from the IRS, including tools, forms, and publications, at the Self-Employed Individuals Tax Center.
Please note: This page offers general legal information, not but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.
