Self-Employment Tax
Some self-employed people get into trouble with the IRS because they don’t pay their self-employment taxes on time.
We don’t want this to happen to you. As a result, we’ve written this blog about self-employment taxes that we hope you will find useful.
To start off, let’s define what self-employment taxes are and how they are calculated.
Self-Employment Taxes Are Used to Fund Medicare and Social Security
Self-employment taxes are the taxes that self-employed people must pay to the IRS to fund Medicare and Social Security. They are similar to the FICA taxes that employers withhold from their employees’ paychecks to pay for Medicare and Social Security. They are calculated using individual rates for Medicare and Social Security that are periodically reset by Congress.
The Rate for Self-Employment Taxes Varies for Medicare and Social Security
The current rates for self-employment taxes includes a 2.9% Medicare rate that’s withheld on all net income earned and a 12.4% Social Security rate that’s currently withheld on only the first $142,800 of net income earned. While these rates seem a little steep, you have to remember that you are also paying the portion of the Social Security and Medicare taxes that employer pay for their workers.
Most Self-Employed People Must Pay Self-Employment Taxes
- You earn at least $400 in self-employment income during a calendar year.
- You run a business as an independent contractor.
- You operate a business as a sole proprietor.
- You are a member of a recognized partnership that conducts trade as a business entity.
- You work as a housekeeper or a nanny for a family who employs you as an independent contractor.
1) Choose the Right Time to Report and Pay Your Self-Employment Taxes
The IRS offers different schedules for reporting and paying self-employment taxes. The two most popular schedules include a quarterly schedule and a yearly schedule. Let’s compare them to see what they offer to taxpayers.
Quarterly
The IRS allows you to file quarterly estimates of your self-employment taxes by filling out IRS form 1040-ES. These estimates are due once a quarter in January, April, June, and September.
We strongly encourage our clients to file quarterly estimates whenever possible because it offers the easiest way to manage your tax bill by dividing it into four smaller payments that are easier to calculate than one larger lump-sum payment.
Yearly
If you make less than $1,000 a year through self-employment, the IRS allows you to file a yearly summary of your self-employment taxes. This summary is usually included with your federal tax return. This accounting method is useful if you work part-time or if you’ve just started a new gig because it allows you to list your income and deductions on one form that’s easy to include with your federal tax return.
2) Get Your Paperwork Ready
- A schedule C form that lists your profit or loss.
- If you used a 3rd party payment processor, look out for a 1099-K form that lists your payments received and fees that were deducted.
- IRS Form 1040. Use this to calculate your yearly income taxes and summarize your total self-employment tax payments for the year.
- IRS Schedule SE. Use this to calculate your self-employment tax payment.
3) Crunch the Numbers and File Your Return
For many self-employed people, crunching the numbers and filing their returns is a very time-consuming process that tests their patience. However, the IRS offers an online portal that makes calculating your tax payment and sending your return a little easier. You can also mail your payments to the closest IRS payment processing center near you.
When Should You Consider Hiring a Tax Professional to Manage Self-Employment Taxes?
It might be better to hire a tax professional to manage your self-employment taxes if any of the following situations apply to you:
- You don’t have the time or patience to do the work yourself.
- You run a business as an independent contractor.
- You don’t understand the rules for calculating or reporting self-employment taxes.
- You’d rather spend your time on more productive tasks.
- You’ve made too many mistakes in the past and want to do the job the right way.
We Can Help You Take The Hassle Out of Managing Self-Employment Taxes
Some of the most important benefits that we offer to our clients include:
- An organized approach that helps you manage even the most complicated tax situations effectively.
- Attention to details that helps you find valuable deductions and keep track of important deadlines.
- Affordable rates and convenient appointment options that make budgeting your money and time simple.
- Ongoing assistance that can help you prepare for future tax returns. Moreover, we also offer outstanding customer service that sets us apart from other Miami-area bookkeeping and accounting firms.