What Is Self-Employment Tax? Here’s What To Know

Freelancing is filled with perks you won’t normally get in your usual 9-to-5. It’s a great way to earn money while doing something you’re not only passionate about but you’re also good at. You can dictate your working hours, choose projects you like, and charge your clients whatever rate you deem fit.

But this freedom does come with a small caveat. As an independent contractor, your taxes aren’t withheld automatically from your checks. You need to calculate and pay your self-employment tax.

In today’s blog, we’ll be talking about the crucial things you need to know about taxes for freelancers. Let’s get started!

What Does It Mean To Be Self Employed?

Before we dive into self-employment taxes, let’s talk about what it means to be self-employed.

Self-employment, in a nutshell, means you’re working for yourself rather than an employer. A self-employed individual can be in any trade, profession, and occupation as long as they work solely for themselves and contract directly with clients. This could include writers. Tradesmen, freelancers, traders and investors, lawyers, salespeople, and even insurance agents.

In the US, the Internal Revenue Service (IRS) defines self-employed persons are those who:

• Engage in trade or business as a sole proprietor or an independent contractor
• Are members of a partnership involved in trade or business
• Are in business for themselves (including a part-time endeavor)

In terms of taxation, clients of self-employed individuals don’t withhold taxes on their payments. Hence, the responsibility of proper accounting including calculating and paying taxes rests on the person offering the service.

What Is Freelance Income Tax

As a freelancer, you’re required by the IRS to file an annual return and pay estimated tax quarterly. If you are self-employed, you pay income taxes on your personal tax return (called “pass-through taxes”).

If you are a sole proprietor (or single-member LLC), you must complete a Schedule C and pay self-employment taxes (SE taxes) based on the net income from that business. This is the equivalent of Social Security and Medicare taxes withheld from the pay of most wage earners. Your SE tax can be determined using the IRS Form 1040-ES each.

The SE tax rate is 15.3%. This consists of 2 parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040 or 1040-SR.

If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040 or 1040-SR. But in some situations your loss is limited. See Pub. 334, Tax Guide for Small Business (For Individuals Who Use Schedule C) for more information.

Who Should Pay Self-Employment Tax

According to the IRS, you must pay self-employment tax and file Schedule SE (Form 1040 or 1040-SR) if:

• Your net earnings from self-employment (excluding church employee income) were $400 or more.
• You had a church employee income of $108.28 or more.

Generally, your net earnings from self-employment are subject to self-employment tax. If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C to figure net earnings from self-employment.

If you have earnings subject to self-employment tax, use Schedule SE to figure your net earnings from self-employment. Before you figure your net earnings, you generally need to figure your total earnings subject to self-employment tax.

Meanwhile, if your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirements listed in Form 1040 and 1040-SR.

Self-Employment Tax Deductions

While it may seem like being self-employed means paying more taxes, there are certain ways you can lower your tax bill. There are tax deductions that can lower your taxable income as a freelancer.

You can claim deductions in expenses that the IRS considers “ordinary and necessary” for your business operations including:

• Advertising and marketing
• Office supplies
• Computer equipment and software
• Travel and business meals
• Home office
• Utilities

There are certain things you need to keep in mind, however, if you’re looking into tax write-offs.

For the home office deduction, for example, the IRS will allow you to write off rent and utilities for portions of your home that you use as an office. However, it must be exclusively used for your self-employment work.

For travel and business meals, you’re allowed to deduct the costs of traveling to a job (except if you’re commuting to an office) as well as business meals with clients. This is deductible at a 50% rate. But remember you’ll have to provide concrete evidence that these expenses are necessary for the growth and development of your business.

Some educational costs may also qualify for tax write-offs especially if you take classes for certifications in your field to help enhance your business knowledge. Licensing, registration, and certification costs are also tax-deductible. However, these educational costs should be directly related to your business. You also can’t write off education that trains you for a new career.

The key to successful tax deduction is careful documentation and bookkeeping. Always keep your original receipts and invoices. Keep track of every business expense so you can claim them on your income taxes.

Paying Self-Employment Tax

To pay SE taxes, you need either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN)

If you don’t have an SSN yet, you can obtain it at any Social Security office or by calling (800) 772-1213. You can also download Form SS-5 the Social Security Number and Card website.

If you are a non-resident or a resident alien and you are not eligible to get an SSN, the IRs will issue you an ITIN. To apply for an ITIN, file Form W-7, Application for IRS Individual Taxpayer Identification Number.

You can pay your estimated taxes using these methods:

• By check. Be sure to include the correct payment voucher on Form 1040-ES for the quarter. Also include the words “1040-ES” and your tax ID number on your check.
• Through the Electronic Federal Tax Payment System (EFTPS) (required for corporate estimated taxes)
• By Direct Pay from your bank account, or Credit/Debit card

It’s always a good idea to set aside a portion of every payment you get from freelance work to a savings or checking account. As a general rule, you can save between 20% and 30% to cover your taxes every quarter. This way, you won’t have to worry about where to get the funds to pay the taxes you owe since you’re ready with the amount you need.

When to Pay Self-Employment Tax

The IRS requires self-employed individuals to pay SE taxes every quarter to avoid penalties. This means you might have to make estimated tax payments depending on how much you owe and on your business type.

For sole proprietors, partners, or S-corporation shareholders, you can estimate your taxes using the estimated tax worksheet in Publication 505: Withholding and Estimated Tax.

SE tax calculations should also be included here using the Self-Employment Tax Worksheet (page 6) of Form 1040-ES Instructions to estimate your self-employment tax for the year.

The due dates for estimated taxes are based on the time that the income was received. So:

• For income received for the period January 1 through March 31, the due date is April 15.
• For income received for the period April 1 through May 31, the due date is June 15.
• For income received for the period June 1 through August 31, the due date is September 15.
• For income received for the period September 1 through December 31, the due date is January 15 of the next year.

Get Help If You Need To

Taxes can be confusing at times. The process of determining what you owe, going through your tax records, and filling out tax returns can be a daunting and tedious task. But the good news is you can always turn to tax preparers for help.

Working with a professional accountant will not only help save you time but they can also answer questions and resolve issues about your taxes. They can also help eliminate errors and ensure that your returns are prepared correctly.

Conclusion

The gig economy continues to open up a lot of opportunities for freelancers to find work and earn without being tied to the typical nine-to-five grind. However, this freedom comes with some responsibilities especially in terms of tax payments.

While freelancer taxes may not be as simple and straightforward, having a basic understanding of what your tax liabilities are, when, and how to pay your taxes and file your returns is crucial.

However, you don’t always have to do it by yourself. There are professionals out there who can help you calculate your taxes and even do the filings for you.

Do you need any more freelancing help? Don’t forget to check out the FreeUp blog where we publish helpful articles weekly.