There’s nothing more rewarding than starting and running your own business. But, the particulars of having to keep track of finances and pay taxes can put a damper on your enthusiasm. If you’re self-employed and earn more than $400 in a tax year, you are probably required to pay a combination of income tax and self-employment tax. Here is what you need to know.
Who is Considered Self-Employed?
For tax purposes, the IRS considers a person as “self-employed” if they work for themselves with the goal of earning a profit or livelihood. So, if you’re not an employee or a corporate shareholder, you’re probably self-employed. This counts even if you have another job.
Paying Self-Employment Taxes
Whether or not you have to pay a self-employment tax will depend on your business classification. You will probably need to pay the tax if your business is classified as any of the following:
- Independent contractor
- Sole proprietor
- Single-member LLC
- Partner in LLC
Currently, the self-employment tax rate is 15.3%. This tax is a combination of Medicare (2.9%) and Social Security (12.4%) taxes, both of which you are wholly responsible for as a self-employed person.
Figuring out your self-employment tax is quite simple. It is based on your taxable profits using this formula:
Gross revenue – tax deductions = taxable profit
The IRS allows you to deduct 7.65% from your taxable profit because this is what regular employers are permitted to deduct. So you can take the result of that formula, less 7.65%, and then figure out your taxes due.
Paying Income Tax When Self-Employed
When you are self-employed, you pay similar taxes as if you were an employee. Again, your tax rate will depend on your taxable income. You can figure this out using:
Gross profits – personal deductions and credits = taxable income
Your filing status and taxable income determine your tax bracket, which can range from 10% to 37% in 2021. But you only pay taxes on the amount of income that falls over the limit for a particular bracket, and then lower rates for the remaining income.
When You Are Supposed to Pay Self-Employment Taxes
Many newly self-employed people fail to realize that they are probably required to file taxes quarterly instead of annually. If you expect your tax bill to be $1,000 or more when you file your annual return, you are required to file and make tax payments quarterly.
When you’re self-employed, the IRS expects you to meet certain quarterly deadlines with your returns: These are:
- January 15
- April 15
- June 15
- September 15
If any of those days fall on a weekend or holiday, your estimated taxes will be due on the next weekday.
Other Self-Employment Taxes
In addition to federal taxes, you may be required to pay and file some other tax returns on the state and local levels. These include:
- Sales tax
- State and local income tax
- Payroll taxes if you have employees
Get Qualified Help With Your Self-Employment Taxes
Self-employment can be equal parts fulfilling and challenging. Making a simple mistake on your taxes could prove costly, which is why we recommend you partner with an experienced tax professional.
Orcutt & Company offers comprehensive accounting services to small businesses, including the self-employed. Contact us today today to learn more.