Filing taxes while self-employed? If you’re self-employed and earned $400 or more over the tax year, there are usually two federal taxes you’ll need to pay: self-employment tax and income tax.
But before we do a deep dive into these types of taxes, let’s answer one crucial question:
Who counts as self-employed?
The term “self-employed” can be confusing because different people use it in different ways. Even if you don’t identify as self-employed, it’s important to know how the IRS defines it so you don’t accidentally blow off your tax obligations.
You generally qualify as a self-employed person if you work for yourself, with the goal of earning a livelihood or profit. So for the work you do, you’re not a corporate shareholder, and you’re not an employee.
Take note that you don’t actually need to be making money to be considered self-employed. If your goal is to earn a profit and you regularly put effort into earning money, the IRS says you’re self-employed.
This definition still counts even if you have a full-time job. If you’re engaged in a profit-driven activity regularly outside of your full-time job (so not just once because your cousin’s best friend’s uncle asked for your help), then you’re officially self-employed.
Do I have to pay self-employment taxes?
Whether you have to pay self-employment tax depends on your tax classification. You’ll likely need to pay the tax if you fall into one of these groups:
- Sole proprietor
- Independent contractor
- Partner in a partnership
- Single-member LLC who has not changed their default tax classification
- Partner in a multi-member LLC who has not changed their default tax classification
How much is self-employment tax?
The self-employment tax rate is 15.3 percent.
Self-employment tax is a combination of Social Security and Medicare taxes. When you’re an employee, you pay for half of your Social Security and Medicare taxes (they are deducted from your paycheck), and your employer pays for the other half. When you’re self-employed, you are responsible for the whole shebang.
Of the 15.3 percent self-employment tax, 12.4 percent is for Social Security and 2.9 percent is for Medicare.
How do I figure out my self-employment tax?
Your self-employment tax is based on your taxable profits. Your taxable profit is your gross revenue minus your tax deductions.
Gross revenue – tax deductions = taxable profit
You generally only pay self-employment tax on 92.35 percent of your taxable profits. The IRS lets you deduct 7.65 percent because that’s what you would get to deduct if you were an employer.
Read more about how to calculate your self-employment tax.
What about income tax?
Income tax works the same for self-employed people and employees. Your income tax rate is based on your taxable income, which is your gross profits minus personal deductions and other tax credits.
You can deduct 50 percent of your self-employment tax amount from your taxable income. This deduction will come in handy when you pay income taxes because it lowers your total taxable income.
Your taxable income and filing status determine the tax bracket that you fall into. In 2020, federal tax brackets range from 10 percent to 37 percent.
The United States has a progressive tax system, which means that while you may be in a tax bracket, let’s say 24 percent, you don’t pay that percentage on all of your earnings. Instead, you only pay that percentage on earnings over a certain limit. The rest of your earnings are divided up into sections and taxed at the corresponding tax bracket rates.
This is good news if you’re in a higher tax bracket—your taxes aren’t as bad as they sound!
In other words, when calculating your income tax, don’t multiply your taxable earnings by your tax bracket percentage. Rather, consult a tax bracket table to see how much you owe.
How much do these two taxes add up to?
Let’s do an example together so you can see how self-employment taxes and income taxes work in real life.
Say your annual gross revenue is $130,000 and you have $30,000 in tax deductions. Your taxable profit is $100,000.
| Gross revenue | $130,000 |
| Tax deductions | -$30,000 |
| Taxable profit | $100,000 |
Now, let’s calculate your self-employment tax, which is 15.3 percent:
| Taxable profit | $100,000 |
| Earnings subject to self-employment tax (92.35% of taxable profits) | $92,350 |
| Self-employment tax | $14,130 |
In this scenario, your total self-employment tax is $14,130.
To calculate your income tax, we’re going to assume that you’re a single filer with no additional tax deductions or credits besides the self-employment tax deduction.
| Taxable profit | $100,000 |
| Self-employment tax deduction (50% of self-employment tax) | -$7,065 |
| Standard deduction (2020 rate) | -$12,400 |
| Taxable income | $80,535 |
As a single filer with a taxable income of $80,735, you fall in the 22 percent tax bracket. But remember: you don’t pay 22 percent on that entire amount. Rather, you pay $4,543 plus 22 percent of the amount over $39,475, which in this case, is $40,060.
So your income taxes would be:
| Tax on earnings up to $39,475 | $4,543 |
| 22% tax on $40,060 | $9,033 |
| Total income tax | $13,576 |
Now the last step is to add your income tax and your self-employment tax together:
| Self-employment tax | $14,130 |
| Income tax | $13,576 |
| Total tax | $27,706 |
In this scenario, your total income and self-employment taxes add up to $27,706.
Am I supposed to pay my self-employed taxes quarterly?
If you expect to owe $1,000 or more when you file your return, you’re generally required to send a tax payment quarterly.
If you’re self-employed, the IRS expects you to pay taxes four times a year, which is roughly every quarter. You won’t know exactly how much you’ll owe until you file your taxes and get your final tax bill. This is why quarterly taxes are also called estimated taxes.
Your estimated taxes are due:
- January 15
- April 15
- June 15
- September 15
If any of these days fall on a holiday or the weekend, your estimated taxes are due the following day that’s not a holiday or weekend.
Are there any other taxes I need to know about?
We’ve focused on federal taxes in this article, but depending on the type of business you have and your business activities, you may have to pay other taxes. Some additional taxes you may need to pay include:
- State and local income tax
- Sales tax
- Employer payroll taxes if you run payroll for employees
And those are the details on filing taxes while self-employed. Knowing which taxes you have to pay, and roughly how much, means you’ll have an easier time planning for tax season—and hopefully, a lot less stress.
