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Self Employed

The ultimate guide to paying self-employment taxes

Marin Perez

Updated February 8, 2019

Being your own boss is great. It also means your taxes can be more complex. This self-employment tax guide walks you through the tax basics of what to expect. We'll also spotlight some valuable deductions that could lower your tax bill.

Self-employment tax basics checklist

If you had a W2 job, your taxes are pretty straightforward. You earn a steady wage and your employer withholds taxes for you. At the end of the tax year, you either get a tax refund or have to pay additional taxes.

Your tax situation becomes a bit trickier as a self-employed worker. This applies if you're starting your own bakery, driving for Uber, have a consulting firm or are a real estate agent.

The following self-employment guide aims to walk you through the tax basics. Here's a checklist of the relevant taxes and we'll dive into more details below:

  • You have to pay federal income tax on your net profit (income minus deductions)
  • You have to pay the self-employment tax of 15.3 percent, which goes to Medicare and Social Security
  • You'll likely have to pay estimated quarterly taxes
  • Deductions can greatly reduce your tax bill. In most cases, you likely qualify for more deductions than a W-2 worker

One of the main things you should know about the self-employed tax basics is that how you legally organize your business has different tax implications. This post focuses on the taxes a self-employed, sole proprietor has to worry about.

What do the self-employed have to pay taxes on?

The self-employed must pay taxes on their net profit from their business. You can use IRS Schedule C, Profit or Loss from Business, to determine your net business income.

How much is the self-employment tax?

In general, you must file an income tax return if your net earnings from your business were $400 or more. You may still have to file if you meet certain requirements and your  net earnings were less than $400. You can deduct most net losses from your gross income. But, there are some limitations to what you can consider as a loss.

What is the self-employment tax?

Self-employed workers must file an annual tax return and most must pay estimated quarterly taxes. You'll likely pay federal income tax, applicable state and local income taxes, and the self-employment tax‚ which consists of Social Security and Medicare taxes.

The Social Security tax is a flat rate on net self-employment income up to an annual income ceiling. That ceiling is annually adjusted for inflation.

The Medicare tax is a flat rate with no income ceiling, and it includes an extra tax for those earning over a certain threshold. Taxpayers will shell out an additional 0.9% Medicare tax on the amount of annual income that exceeds $200,000 for single filers, $250,000 for married filing jointly, and $125,000 married filing separate.

Self-employment tax rates

When it comes to self-employed tax basics, you need to know what your tax rate will be. The self-employment tax rate is 15.3 percent.

  • 12.4 percent of this goes toward Social Security
  • 2.9 percent for Medicare

   Year Social Security Tax Medicare Tax   2019 15.3% on income up to 132,900 2.9% - 3.8% of all income   2018 15.3% on income up to $128,400 2.9% - 3.8% of all income   2017 15.3% on income up to $127,200 2.9% - 3.8% of all income   2016 15.3% on income up to $118,500 2.9% - 3.8% of all income      

This is the amount of you have to pay every quarter in addition to your annual return on your income.

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Estimated taxes and tax deadlines

Sole proprietors pay the self-employment tax to the IRS four times per year as part of their estimated taxes. Self-employed people generally must make estimated tax payments if they expect to owe taxes of $1,000 or more when they file the return. When filing your annual tax return, include an IRS Form SE to show the IRS how much self-employment tax you were required to pay for the year.

In general, the estimated tax due dates fall on April 15, June 15, September 15, and January 15 of the following year. Each due date covers the income received in the three-month period before it. The estimated tax due dates hit the same general time frame each year. Of course, these can vary based on holidays or weekends.

          Date      What's Due      Payment Period        April 15  Pay first installment of estimated tax  Jan. 1 - March 31    June 15Pay second installment of estimated tax April 1 - May 31  Sept. 15Pay third installment of estimated tax June 1 - Aug. 31    Jan. 15Pay final installment of your previous year estimated taxes Sept. 1 - Dec. 31        

Self-employed guide: Tax deductions you can take

I can't stress how important it is for self-employed workers to know what deductions they can take. The more deductions you have, the lower your taxable income will be. Lower taxable income means you'll pay less income tax. Let's take a look at some valuable tax deductions sole proprietors can't afford to miss.

Social Security, Medicare deduction

W-2 workers also pay Social Security and Medicare taxes through payroll taxes. But, the employer shells out half of it. Because of this, self-employed workers can deduct 50 percent of their self-employment taxes.

Health insurance tax deduction

Self-employed workers have to pay for their medical expenses and health insurance out of their own pockets. Those who don't have minimally adequate health insurance coverage are now subject to a tax penalty.

Self-employed workers can claim some special tax deductions to help with medical and health insurance costs. For example, self-employed workers can deduct health insurance premiums for themselves, their spouses and their dependents. Deductible insurance costs include dental and long-term care coverage, as well.

There are some limitations on the health insurance tax deduction, though. You can only deduct as much as you earn from your business. If your business generated a net loss for the year, you can't take this deduction.

Additionally, you can't take this deduction if you're eligible to participate in a subsidized health insurance plan maintained by an employer. Still, it can reduce your bill when it comes to self-employment tax time.

The mileage deduction

Taking advantage of the mileage deduction is a great way to lower your self employment tax bill. You can only use the mileage deduction for business trips. But, these can add up if you keep track or every drive.

Business driving includes travel between offices, driving for business-related errands, visiting customers, entertaining customers and more. Driving from your house to an office is considered commuting. This is never deductible, even if you're doing work during the trip.

There are two ways to claim the business mileage deduction: using the standard mileage rate or the actual expense method. The standard mileage rate means you multiply the number of business miles by the rate set by the IRS to find your deduction.

The actual expense method requires keeping track of the costs for your car. This includes gas, insurance, tires, depreciation and more.

The standard mileage rate is far simpler and most tax experts recommend using this for the first year of a car's business usage. You can always switch to the actual expense method the year after. And then, you can switch between the two in later years. If you start with the actual expense method, you're not allowed to switch to the standard mileage rate.

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