Tax Guide for the Self-Employed: What You Should Know

By DeBlanc + Murphy
January 15, 2024

You are in a unique tax situation if you are self-employed, a freelancer, or part of the gig economy. Unlike traditional employees, self-employed individuals must use different tax forms, are responsible for making quarterly tax payments, and need to track business expenses to write them off when tax season arrives.

If you’re unsure how to prepare for tax season or have questions about how it all works for the self-employed, read on. We’ll give you a quick overview of what to expect and how to prepare.

The IRS Definition of “Self-Employed”

According to the IRS, “self-employed” individuals fall into one of the following four categories:

Sole Proprietors: If you operate a trade or business not part of a legal entity, such as a corporation or partnership, the IRS considers you self-employed.

Independent Contractors: If you provide services under a contract, freelance, or are a gig economy worker who is not considered an employee, you are self-employed.

Partners: If you are a partner and share ownership and responsibility in a trade or business, you are self-employed.

In Business For Yourself: If you are in business for yourself, whether part- or full-time, you are self-employed.

What is Self-Employment Tax?

Unlike traditional employees who have payroll taxes taken out of their checks every month and then split the “cost” with their employers, self-employed individuals must pay both the employer and employee tax portions—a total of 15.3%.

Self-employed individuals must also make semi-quarterly tax payments throughout the year if they anticipate owing more than $1,000.

Filing Self-Employment Taxes

To understand your tax obligations, you must determine your tax rate and local tax requirements. 

To calculate your tax rate, you must first determine your net profit or loss by subtracting your business expenses from your income. If you lost more money than you made, you’ve experienced a net loss.

If you earned more than $400, you must file a Schedule C (1040) form. You will still have to file a return if you earned less and meet the requirements listed in this form.

To determine your local or state tax requirements, visit your local government’s website online or search by state here.

Calculating Self-Employment Tax

As we mentioned above, the self-employment tax rate is currently 15.3%. This covers two components: Social Security tax (12.4%) and Medicare tax (2.9%).

It’s worth mentioning that this tax applies to your net earnings. Only the first $160,200 of your earnings are subject to Social Security tax.

To determine your tax liability:

  1. Calculate your net annual earnings by subtracting your business expenses from your income.
  2. Now apply the 15.3% tax rate.

That’s the total self-employment tax before any deductions or credits. However, if you experienced financial loss or made little money, you can calculate your net earnings by filing a Schedule SE. While 92.35% of your net earnings are generally considered taxable, a Schedule SE form allows you to adjust your net earnings so that you’re not taxed on income you didn’t earn.

Prepare to File Taxes

Filing your taxes involves your quarterly estimated tax payments and an annual return.

For quarterly payments, use Form 1040-ES, which is similar to Form 1040. Keeping the previous year’s return is crucial because you’ll need it to complete Form 1040-ES. You can make estimated payments using the blank vouchers included in the form and mail them in or file electronically. You must calculate your annual income for the following year if you're newly self-employed.

To file your annual return, you must report your income or losses. You must also account for your Social Security and Medicare taxes on Form 1040. It’s worth mentioning that the income or losses calculated on Schedule C or Schedule C-EZ will help you determine the social security and medicare taxes you paid throughout the year.

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