Crunching the Numbers: Self-Employment Taxes Simplified

Business Tips + Tools

March 28, 2023
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Self-employment taxes cause many of us freelancers and business owners headaches and undue stress. It doesn’t have to be overly complicated, though. Let’s break down exactly what is taxed, on which forms, and when they’re due.

What exactly is self-employment tax?

Self-employment tax is a tax that freelancers, independent contractors, and many small business owners must pay to the government to fund Social Security and Medicare programs. 

Employers are usually obligated to pay half of the Social Security and Medicare tax for their employees, so when you become self-employed you are responsible to pay both. 

In the US, sole proprietors and single member LLC owners must pay 12.4% for Social Security and 2.9% for Medicare, totaling 15.3% of your business profits.

You are also required to pay your federal income tax on top of the Social Security and Medicare taxes, as well as state taxes, when applicable. 

The self-employment tax you pay is based on your business profits

The tax payments you are expected to make are based on your business’s profit. Business profit is determined by the amount of income you made, meaning the total payments that flowed into your business, minus your business expenses, or the necessary costs of operating your business. 

Say you took in $11,000 this year for various copywriting projects. You spent $144 for Grammarly Pro, $650 for website hosting, $525 for marketing, $72 on notebooks and pens. 

Subtract the $1,391 from the $11,000 you netted, and your profit was $9,609.

Sole proprietors and single member LLCs should be paying estimated quarterly taxes

The government wants to make sure it receives the right amount of tax revenue throughout the year. Because you don’t have taxes being taken from your paychecks regularly, the IRS expects you to make estimated quarterly tax payments. 

These quarterly tax payments include both your Social Security and Medicare taxes, totaling 15.3% of your business profits, as well as your federal income taxes. The total will be roughly 30% of your profits. 

Estimated quarterly tax payments are due 4/15, 6/15, 9/15, 1/15 each year. If these dates happen to fall on a weekend or a national holiday, you have until the following Monday to make the payments on time. If your payment is late or you miss a quarter, you will be fined 0.5% of the unpaid tax for each month or part of a month that the payment is late. The penalty can be up to a maximum of 25% of the unpaid tax. The IRS will also charge interest on the unpaid tax from the due date of the payment until the date the tax is paid in full. The interest rate is determined quarterly and is based on the federal short-term interest rate plus 3%. 

Basically, you don’t want to miss a payment or send one in late. To avoid ever missing an estimated quarterly tax deadline you can sign up for our free reminder emails which we send out two weeks prior to and on the morning of each quarter’s due date. 

How to pay estimated quarterly taxes

Once you’ve determined how much you need to pay (roughly 30% of your business profits), you need to send the money to the IRS. How do you pay your self-employment taxes, you ask? Well, conveniently there are several ways you can pay your quarterly taxes.

Pay your estimated quarterly taxes by debit or credit card

This is one of the easiest ways to pay, but there are fees. You must go through an IRS approved processor, and each one charges a slightly different amount. 

EFTPS (Electronic Federal Tax Payment System)

This is a free system offered by the U.S. Treasury. It allows you to not only pay, but also to schedule payments up to one year out, track payments, and even receive help with payments or questions from an IRS Customer Service Agent. You can enroll online for the EFTPS.

Same-day wire

Your ability to use this method will depend on your bank, and has some of the highest fees. It’s not our favorite method, but if all else fails,it is an option.  

Check or money order

The only fees here are the cost of the check or money order itself. These must be mailed and postmarked by the due date to avoid late fees or penalties.  

Cash

Believe it or not, cash is still an accepted form of payment for self-employment taxes. DO NOT MAIL CASH TO THE IRS. There are a number of retail affiliates that work with the IRS and will accept cash payments. There are some limits, such as a maximum of $500 per payment, $1000 per day total, as well as a $1.50 fee per payment. The following is a list of participating retailers:

  • Dollar General
  • Family Dollar
  • CVS Pharmacy
  • Walgreens
  • Pilot Travel Centers
  • 7-Eleven
  • Speedway
  • Kum & Go
  • Royal Farms
  • Go Mart
  • Kwik Trip

Make payments via the IRS’s official app, IRS2Go

This is my personal go-to when making tax payments, despite the app’s outdated user interface. It basically taxes you to the IRS’s approved processors or the EFTPS as described above, but all from the convenience of your phone. It makes the process quick and easy. 

What if you can’t predict how much money your business will earn?

This is a great question. When I first got started as a web developer my earnings were all over the place. I took on a few giant projects in Q1 and struggled to find new clients in Q3. A few years after I had solidified my earnings I stopped taking client work entirely so I could build Virtualcopia. Quickbooks self-employed kept telling me I owed a ridiculous amount each quarter because it was calculating based on the previous year’s earnings. 

The best advice I can give you is to keep your bookkeeping up to date and as detailed as possible. Spend a bit of time each week to make sure every transaction has been logged. This way you can make real time calculations each quarter. Our members have access to Virtualbooks, a simple bookkeeping sheet designed to track all of your income and expenses while automatically calculating your estimated quarterly tax burden. 

By calculating your actual 30% estimated tax burden each quarter, you are less likely to be fined for underpaying or end up owing more at the end of the year. 

Self-Employed Tax Forms

Ok, so we’ve covered the basics of self-employment taxes and estimated quarterly tax payments. Now let’s dive into other formalities; self-employment tax forms.

W-9 Forms

The purpose of a W-9 is to collect your information, including legal name, address, and social security number or EIN (employer identification number) so they can report how much they paid you to the IRS at the end of the fiscal year. 

Every client you work for should send you a W-9 form unless it is a one-off job for which you will be paid less than $600. You should receive your W-9 up front when you are being onboarded with a new client or contract. 

The information you submitted in your W-9 form should be kept up to date so that the client knows where to send your 1099 in January. 

1099 Forms

1099 tax forms document how much you were paid by a company or non traditional employer. You should receive a 1099 from each client or platform (think: affiliate platforms or eBay, for example) that paid you more than $600 the previous year. You should receive your 1099s no later than January 31. 

If you don’t receive a 1099 by February 15th from someone who paid you more than $600 during the fiscal year you still need to report that income. Try contacting the employer or platform and requesting another copy. If that doesn’t work you can call the IRS at 1-800- 829-1040 for help.

1040 Form Schedule C

You are probably already used to filing your annual taxes on a 1040 or 1040EZ form. You will still use this form to file taxes as a sole-proprietor and often as a single member LLC. You will report your 1099 and miscellaneous income, as well as your business expenses on Schedule C of the 1040. 

Self-employed annual tax return

So you’ve paid your estimated quarterly taxes—that should be it, right? If only. You are required to file your annual income tax return no matter your employment status. 

All of your independent contractor work should be reported on 1099s. You will need to input the information from each 1099 on a Schedule C form accompanying your 1040 form. Your schedule C should also include any miscellaneous income you earned during the year and all of your business expenses. 

Luckily, you can often file federal annual taxes for free when you’re self-employed. If you’re doing your own taxes, the IRS website offers sources for free filing. Most of them will allow you to file schedule C for no extra cost. 

If you are overwhelmed by the idea of filing your own taxes, there are many people who specialize in self-employment and small business taxes. While you will have to pay a bit of a premium for professional tax services, it’s usually worth it for the peace of mind. The tax prep fees are also deductible on next year’s taxes!

Some of our favorite tax specialist who focus on self-employment are:

Nacondra Moran of Exceptional Tax Services  @exceptionaltaxservices

Elizabeth Gray-Zaslove, CPA of Zaslove Accounting @caffeinatedcpa

Brittany Howard of Victory Business Solutions @victorybusinesssolutions

Katelyn Magnuson of The Freelance CFO @thefreelancecfo

Jessie

I am the founder of VIRTUALCOPIA Business Collective and a self-employment enthusiast. I hope to inspire others to take a leap into their own entrepreneurial journeys while providing resources and support, and facilitating a community.

P.S. This post may contain affiliate links. We only recommend products and services that we would use ourselves—we’re not just in it for the money.