Taylor Medine – Forbes Advisor
Navigating the process of filing taxes when you’re self-employed can be intimidating, especially for a first-timer. If you’re not sure how self-employment taxes work or are wondering what self-employed tax documents you need to file, you’re in the right place. This guide demystifies what you need to know about reporting income you earn outside of a traditional 9-to-5.
Who Needs To Report Self-Employment Income?
Part-time and full-time workers who earn $400 or more in net self-employment income—that is, self-employment earnings after expenses—must report that money to the IRS, and the income may be subject to self-employment taxes.
Not sure if any of this applies to you? “Self-employed” is a term that describes workers who are sole proprietors, independent contractors or members of a partnership. The self-employed include freelance writers, photographers, designers and drivers for ride-hailing services such as Lyft and Uber.
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As a self-employed worker, you may receive 1099 tax forms from clients detailing what you earned, and you can use those to file your tax return. But if you don’t get 1099s, the IRS still expects you to report earnings and pay the self-employment taxes you owe.
What Is Self-Employment Tax?
If you work for yourself, you’re required to pay a 15.3% self-employment tax on your earnings to support the Medicare and Social Security programs. The tax is in addition to your income taxes.
When you work for a traditional employer who documents your earnings on an IRS Form W-2, your employer pays half your Medicare and Social Security taxes, representing 7.65% of what you make, and you pay the other half. But when you are your own boss, you’re on the hook for the entire 15.3%.
One conclusion is that you may be able to take an income tax deduction for 50% of the self-employment tax you pay, giving you a bit of a tax break.
4 Steps for Filing Self-Employment Taxes
Filing self-employment taxes is fairly straightforward. You basically tell the IRS how much you earn and subtract business expenses from that amount. Then, you calculate the tax you owe and pay it. Here’s an overview of the process:
1. Tally Up Your Income
Put together all of your Form 1099-NECs to add up your total “nonemployee” compensation. If you don’t receive 1099s (or if you’re missing a few), you should still include income from all sources on your tax return.
2. Pull records for business expenses
Next, gather financial statements, invoices and receipts that show how much you spend on your business over the course of a year, because you’ll want to write off your costs. Examples of deductible business expenses include gasoline and car maintenance if you drive for Uber, or office supplies and internet service if you run an online business.
Note that you can deduct only expenses that are ordinary and necessary to run your business, not personal expenses.
3. See What Tax Deductions You Qualify For
Everyday business expenses aren’t the only deductions self-employed workers can take to reduce their taxable income. If you contribute to a traditional IRA, SEP-IRA or SIMPLE IRA, those payments may also be deductible. The same goes for payments to a health insurance plan for yourself and any dependents.
4. Fill Out Necessary Tax Forms
Self-employment income and taxes are reported annually on IRS Form 1040. Self-employed workers not using tax software typically must also fill out the following schedules and include them with their returns:
- Schedule C (Profit or Loss From Business): Here, you’ll list your business income and expenses to determine your business’s net profit or loss.
- Schedule SE (Self-Employment Tax): Schedule SE is used to calculate your self-employment tax, taking into account your net profit or loss from Schedule C.
- Schedule 1 (Additional Income and Adjustments to Income): You report the profit or loss from your business on Schedule 1 and use this form to claim several self-employment deductions, including the self-employed health insurance write-off.
The best tax software for the self-employed will fill out those schedules for you and electronically attach them to your return when it’s filed.
Or, you could hire a tax professional to pull the paperwork together for you.
When and How to Make Quarterly Tax Payments
Because tax isn’t withheld from any paychecks, self-employed workers who expect to owe $1,000 or more in tax for the year are required to estimate and pay taxes on a quarterly basis.
Use the IRS estimated tax worksheet, Form 1040 ES, to determine your estimated payments.
Once you’ve done the math, you can send estimated amounts by check or make online payments through the IRS’ electronic federal tax payment system (EFTPS) each quarter. Payments for each previous quarter are due April 15, June 15, Sept. 15 and Jan. 15.
Not paying or underpaying taxes during the year can result in a tax penalty, so it’s smart to enter the quarterly payment dates into your calendar. Speak with an accountant if you have questions about what you owe.
Earning money on your own terms outside of a 9-to-5 job can be gratifying, but the self-employment taxes can be difficult to understand—and expensive.
Tax planning throughout the year can make filing taxes less of a headache. Avoid a surprise tax bill in April by reviewing business expenses throughout the year, looking out for tax deduction opportunities and keeping up with your quarterly estimated tax payments.
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