6-7 minute
Freelancers, independent contractors , and other self-employed professionals are responsible for paying several taxes on their income—one of which is the self-employment tax (SE tax). The SE tax, used to fund Social Security and Medicare, is equal to the total amount owed for those two programs.
This tax is higher than the Social Security and Medicare taxes you pay when working for someone else because employers have to share these taxes with their employees. When self-employed, you are responsible for paying the entire amount yourself.
The SE tax applies to 92.35% of your net income. Net income is calculated by subtracting your business expenses from your gross income . The amount you pay in SE taxes can vary from year to year depending on this figure. Here are some other factors to consider:
If your business's expenses exceed its income, the result will be a net loss. You can deduct net losses from your gross income, but only up to a certain limit. For more information, see Publication 334, Tax Guide for Small Business .
The SE tax rate is 15.3% – a combined total of the 12.4% Social Security tax and the 2.9% Medicare tax. This contribution funds programs that provide benefits to retirees, people with disabilities, and children. These taxes are applied in different ways:
Along with the SE tax, you may also be responsible for paying federal income taxes. As a self-employed individual, if your net income equals at least $400, you must file an income tax return. And even if that's not the case, you may still have to file an income tax return according to the additional filing requirements listed on Form 1040 .
State and local taxes are also separate from the SE tax. You'll probably have to pay state income taxes as well as sales and use taxes . These may apply to your situation in different ways:
For example, let's say you work in New York but buy an office laptop online from a seller in another state. Even if the seller doesn't charge NY state and local taxes, you'll have to pay them later. These tax rates and rules vary by location - visit your state's government website for more information .
There are several tax breaks available to entrepreneurs. For example, you can deduct the employer portion of the SE tax from your adjusted gross income. Another example is the qualified business income (QBI) deduction. It allows you to deduct up to 20% of your QBI, as well as up to 20% of real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income.
Other common deductions include:
If you're unsure about whether your self-employment expenses can be forgiven, contact a tax professional.
To report and file Social Security and Medicare taxes, you will need Schedule SE (Form 1040), Self-Employment Tax. However, you can use the estimated tax method to pay income and SE tax using Form 1040-ES, Estimated Tax for Individuals. Depending on the business structure (sole proprietorship, LLC, partnership, etc.), you will likely need additional forms .
In most circumstances, you must file an annual tax return and make quarterly estimated tax payments . If you wait to pay taxes until the following April, when your annual tax return is due, the IRS may impose a penalty. Each quarterly payment period coincides with the IRS due date :
If the due date falls on a weekend or federal holiday, you have until the next business day to file the application without penalty.
Filing and submitting SE taxes can be complicated, so most entrepreneurs use tax software or hire a professional to help make it easier. Here's a general overview of the process:
You can make quarterly payments online using the Electronic Federal Tax Payment System (EFTPS®) or submit vouchers on IRS Form 1040-ES .
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