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How Do I File Taxes When I’m Self Employed?

By August 2, 2021August 18th, 2021Tax Advice
file taxes when I'm self employed

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
  • Partner
  • 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.