An Introductory Guide to Paying Self-Employment Taxes

Whether you work as an independent contractor or have formed your own registered business, you are now subject to self-employment tax on your self-employed income. If this is a recent change in your income, you might be a little uncertain about how to pay your taxes now. This brief guide will give you some of the basic information you need to know about paying self-employment taxes. If you’re still uncertain of how to proceed, contact us for self-employed tax help in Provo.

Why Do You Have to Pay Them?

Many new business owners and first-time contractors may feel a little shocked at the amount they have to pay on their self-employed income. But consider this: Typically, the income you receive through your contract work or your business is not taxed upfront, while the paychecks you receive as a W2 employee will usually already have income taxes, Social Security, and Medicare taken out of them.

As a self-employed taxpayer, however, you don’t have an employer to apply those taxes for you, and you must do it yourself. So, while a standard W2 employee is only “balancing” their income tax with the IRS when they file, you’ll be paying your income tax, as well as your self-employed taxes, which include the Social Security and Medicare taxes.

Who Has to Pay Them?

Most individuals who receive self-employment income exceeding $400 in a single year must pay self-employment tax, as well as income tax on those funds. If you’ve registered as a business, certain business structures can be exempt from self-employment taxes, so it’s important that you discuss this with a CPA to fully understand how your business structure impacts your taxes.

How Much Are Self-Employment Taxes?

Currently, the Social Security tax rate is 12.4%, and the Medicare tax rate is 2.9%. This brings the total self-employment tax rate to 15.3%. For most self-employed individuals, the Medicare portion of the self-employment tax will be applied to all of your net income from self-employment, while the Social Security portion will only be applied to the first $128,400 of that income. There are some exceptions to this, however, so do some research or seek professional help with self-employment taxes

Additionally, an extra Medicare tax may be applied to some self-employed income exceeding a specified amount. The current thresholds for this additional Medicare tax are:

  • $125,000 for married individuals filing separately
  • $250,000 for married couples filing jointly
  • $200,000 for other individuals

To learn more about the additional Medicare tax, visit this page on the IRS website.

How Do You Report Self-Employment Income?

While reporting self-employment income is going to be more complicated that reporting income from a W2, it can actually be a lot simpler than you might imagine. Typically, there are only a couple of additional forms that are required. Your self-employment income is reported on Form 1040, and depending on your exact situation, you might need to attach a few additional schedules to that form.

You can use Schedule SE to calculate your self-employment tax, and attach this to your Form 1040. If additional adjustments are required, use Schedule 1. Simply include your Form 1040 and any associated schedules with the rest of your tax return, and your self-employment income is covered. Then, you can proceed with paying your taxes (or receiving your refund) as normal, using whatever payment method you prefer.

Are Your Self-Employment Taxes Deductible?

While self-employment taxes can quickly add up, luckily, half of that amount can be deducted on your income taxes. Use Form 1040, Schedule 1 for this deduction. However, it’s important to note that this deduction only affects your taxable income in regards to your income tax. It won’t reduce your net earnings from self-employment, nor will it impact the amount you pay in self-employment taxes.

When Should You Pay Them?

If you receive self-employment income (and especially if it’s your primary source of income), it’s highly likely that you should be making estimated quarterly payments on your taxes. The US uses a pay-as-you-earn tax system, which means the IRS expects you to pay your taxes as soon as you earn your income, rather than waiting until you file your return.

Most business owners must estimate their income for the year and make installment payments each quarter. Failing to do this may lead to major fines and penalties for underpaying on your taxes throughout the year.

If you have any questions or need assistance with quarterly tax payments, self-employment taxes, or other business tax needs, contact us for self-employed tax help in Provo. One of our business tax experts will gladly assist you.