If you're self-employed, learn about self-employment tax, what it is, and how it works this tax season.
Working for yourself has become more and more common over the years. Many people even have several jobs, including side gigs, contract work, and freelancing.
If you do any kind of work for yourself and earn an income from that work, then you may need to file self-employment taxes (SE taxes) this year.
What is Self-Employment Tax?
What is self-employment tax? It is like payroll tax, but specifically for freelance and independent contracting income.
Income is considered self-employed income if you received through freelance or independent contracting work. This self-employment income will then be subject to SE tax.
How Much is Self-Employment Tax?
How much is self-employment tax? This amount may vary year to year.
For example, in 2021 the first $142,800 of your self-employment income was subject to this tax. In 2022, this amount went up to $147,000.
These amounts refer to how much of your self-employed income is subject to self-employed tax, aka how much of your income is liable to taxes.
This amount is the amount of income that the SE tax rate will be applied to.
Self-Employment Tax Rates
You can tell how much SE tax is by that year's self-employment tax rate. Currently, the SE tax rate is 15.3%.
This 15.3% is split into 2 parts for social security taxes (12.4%) and Medicare taxes (2.9%).
How to File Self-Employment Taxes
Now that you know what SE tax is, how it works, and who pays it, you can learn how to file self-employment taxes.
First, you'll need to have a social security number (SSN) or an individual taxpayer identification number (ITIN).
Step 1: Make Sure You Qualify
One simple way to figure out if you are self-employed rather than traditionally employed is if you get a W2 tax form or a 1099 tax form.
Self-employed people will get the 1099 form from the clients and companies they work for.
You qualify as self-employed if you any of the following apply to you:
- You are a freelancer
- You are an independent contractor
- You practice a trade
- You have a side gig
- You are in business for yourself
You also only need to file self-employment income taxes if you earned $400 or more from your self-employment income. If you made less than $400, then you do not qualify yet to pay these kinds of taxes.
Step 2: Gather Self-Employment Tax Deductions
Once you know you qualify as someone who is self-employed and needs to pay SE taxes, you can start taking advantage of self-employment tax deductions designed for you!
Remember that many tax write offs for self-employed workers depend on whether these expenses apply to your work or not.
For example, if you use your car for your work then car expenses may qualify, but if you don’t use your car for work, vehicle expenses won’t qualify.
Below are a few deduction examples that could potentially apply to you.
- Vehicle expenses like gas, oil changes, insurance, repairs, etc.
- Wages paid to anyone working for you
- Advertising expenses for your personal business
- Office supplies
- Rent expenses for storage or office spaces
- Banking fees for business accounts
- Legal fees
- Business expenses like accounting, tax preparers, etc.
Whether you handle your business finances yourself or hire a bookkeeper or accountant, keep a careful record of all the expenses associated with your business.
It can help to create a separate business account at your bank so all of those expenses can remain in one location, separate from your personal expenses.
Self-Employed Tax Deductions Worksheet
A self-employed tax deduction worksheet is a worksheet that helps you itemize all your business expenses.
The worksheet will go over every detail of personal business expenses you could have as someone who is self-employed.
That way, nothing will be forgotten or left out of your self-employed tax deductions.
Step 3: Fill Out Self-Employment Tax Forms
Before going into business for yourself, it is a good idea to learn all about small business finances, like which self-employment tax forms you’ll need to use.
For example, here are some of the tax forms you might need if you own and operate a business and earned business income:
Sole Proprietorships: Schedule SE (Form 1040 or 1040-SR)
Partnerships: Schedule K-1 (Form 1065)
Corporations: Schedule M-3 (Form 1120)
S Corporations: Form 1120-S
Limited Liability Company (LLC): Form 1120
You may also need a Schedule C Tax Form (this will report the income and losses of your business) or a Schedule SE Tax Form (this will report your self-employed Social Security and Medicare Taxes).
You might also receive 1099 Tax Forms from different clients as a freelance worker, outlining how much you were paid by them.
These 1099 forms will be used then to fill out your 1040 tax return form, which will be your complete report of all your earnings.
Do I Need to Pay Self-Employment Tax?
Being self-employed means that you are not a traditional employee, which means you don’t receive a W2 to file your income taxes for that self-employed income.
This means you'll need to file and pay your taxes yourself rather than relying on your boss's payroll department managing withholdings for you.
If you are self-employed, a sole proprietor, partnership, or an S corporation then you may need to pay estimated taxes on your federal self-employment tax.
You'll need to make estimated tax payments if you expect to owe $1,000 or more in SE taxes after filing your tax return. If you are a corporation, this amount may go down to $500.
If you are self-employed, a sole proprietor, partnership, or an S corporation then you can use the 1040-ES form to make your estimated tax payments.