Working for yourself has a lot of benefits. It’s liberating to be able to set your own hours and make decisions for yourself. You’re in control of your work instead of just serving as a cog in someone else’s system.

On the other hand, however, there are many critical administrative things an employer does for you. Once you’re working for yourself, you have to take care of all of that independently. 

Whereas employers typically withhold a portion of employees’ income for tax purposes, self-employed individuals have to pay these taxes directly. If you’re working for yourself, you must make estimated quarterly payments throughout the year for both your income tax and your self-employment tax.   

What is Self-Employment Tax?

Self-employment tax refers to taxes paid by an independent contractor that goes to the federal programs of Medicare and Social Security. 

Employers typically pay the Medicare and Social Security tax on their employees’ behalf through FICA. Employers withhold employee wages to pay one part of it, and they pay another portion themselves. 

Self-employed individuals must pay both of those portions on their own. 

Self-Employment Tax Rate for 2020 and 2021

The IRS set the self-employment tax rate at 15.3 percent for the 2020 tax year, and it has not changed for 2021. That rate is the sum of two parts: A 12.4 percent Social Security tax rate and a 2.9 percent Medicare tax rate. 

All of your self-employment income is subject to the Medicare tax, but higher incomes are not subject to the Social Security portion beyond a set point. In 2020, only your first $137,700 in earnings was taxed at the Social Security rate. For the 2021 tax year, the Social Security tax applies to your first $142,800 in self-employment earnings. 

Who has to Pay Self-Employment Tax?

Anyone with $400 or more in earnings from self-employment will be held liable for Social Security and Medicare taxes. If you don’t have an employer to pay your share of those taxes for you, then you will have to pay. 

If you work multiple jobs and have at least one employer withholding income for FICA payments, you may or may not need to pay additional taxes. This will depend on the relative income and the amount paid by your employer. 

How to Calculate Self-Employment Tax

Your self-employment tax total is calculated according to your net income, including wages and tips. Assuming your income doesn’t go above any of the set thresholds, you will pay a total of 15.3 percent of your net earnings in self-employment tax. 

How to Pay Self-Employment Tax

You can pay self-employment taxes online through IRS Direct Pay. You can calculate and report your self-employment taxes with IRS Form 1040, Schedule SE. 

However, to make payments online, you will need to use either your Social Security Number or an Individual Taxpayer Identification Number.  

Paying with a Social Security Number

If you’re eligible for a Social Security Number and card but don’t have one, you can apply for a number and card with the Social Security Office online. The government will use this number to identify you and your records for tax purposes.  

Paying with an Individual Taxpayer Identification Number

For individuals who need to pay taxes but ineligible for a Social Security Number, you can register for an Individual Taxpayer Identification Number with Form W-7

Paying Self-Employment Tax with Estimated Taxes

When an employer pays taxes on your behalf, they don’t wait until the end of the year to make payments. All of these taxes calculated according to income are supposed to be paid throughout the tax year as you earn the income. 

For independent earners, that means paying quarterly estimated taxes to pay self-employment taxes and regular income tax all year long. These taxes can be paid together online, and you can calculate your estimated payments using IRS form 1040-ES. 

If you want to avoid any fines or penalties for underpayment, you should make your estimated payments according to these quarterly deadlines in 2021: 

  • First Quarter Payments: April 15, 2021
  • Second Quarter Payments: June 15, 2021
  • Third Quarter Payments: September 15, 2021
  • Fourth Quarter Payments: January 15, 2022

Tax Deductions for the Self-Employed

Handling all of these regular tax payments can be a significant financial burden for independent contractors, especially if they’re not prepared. On the bright side, there are also a wide variety of tax deductions available that can help you increase your savings and balance some of the money you’ve lost to taxes. 

If you’re self-employed, you are legally operating your own business, which means you can claim many legitimate costs as small business tax deductions.  

Self-Employment Tax Deduction

While being self-employed subjects you to extra taxes, you can claim some of those tax payments as deductible business expenses. You can deduct the portion of your self-employment taxes that an employer would typically pay out of your adjusted gross income. 

Home Office Deduction

Many people work from home these days, but not everyone is eligible to claim a deduction for their home office. You can claim and deduct expenses related to your home office if it is your principal place of business. There must be a specific area of your home that you use exclusively and regularly for work purposes. 

If you meet those requirements, you can count a proportional amount of your home costs as a business expense, including utilities, internet, and rent or mortgage payments. 

Health Insurance Premiums

Anything that your employer would generally pay is likely eligible to be claimed as a tax deduction. That includes health insurance premiums! 

As long as a spouse’s insurance plan cannot cover you, you can deduct the premiums for your health insurance or HMO from your taxable income using the self-employment health insurance tax deduction

Internet and Phone

Depending on what you do, your internet and phone use may be essential for your work. You can deduct a portion of the costs for those services according to their proportional business usage. 

Meals or Travel

If you travel away from your town overnight for exclusively business purposes, then you can claim all of your lodging and travel costs as business expenses. 

Vehicle

If you use your vehicle for a business purpose other than driving to and from a workplace, you can deduct related costs according to its use. With careful records, you can keep track of all your vehicle costs and deduct the qualifying portion. 

A simplified option for deducting vehicle costs is to add up the miles you drive for business and deduct them according to the IRS’s standard mileage rates. 

Interest

While the principal on many loans can’t be deducted, you can deduct the interest on loans, including your home mortgage, even if you don’t have a home office. Don’t leave any of these opportunities on the table! 

Education

The IRS sees continuing education as a regular and necessary part of the job. Any money you spend to help you do your job better or keep up with industry developments is money you can deduct for education expenses. 

This also covers any fees you pay for professional publications or association membership fees. 

Insurance

Do you have a separate insurance policy covering a workplace or some other work-related need? If so, you can claim those premiums as tax deductions as well.  

Workplace Operation

For those who have an office apart from your home, you can deduct the rent and utilities for that office as work expenses. You can also remove any other costs related to maintaining your workplace. 

Whether you have a separate office or not, you can deduct costs for office supplies, software, or technology used exclusively for your business and most costs related to employees and staff.  

Startup Costs

The IRS also provides an opportunity for new businesses to claim deductions for startup costs. This includes many one-time expenses involved in setting up your workplace and establishing your work infrastructure.

Work with an Accountant

As you can tell, there are many opportunities to help you keep your tax burden manageable. The problem is that few self-employed individuals have the time or expertise to figure out the tax system and claim the savings they genuinely deserve. 

If you don’t want to stress over your taxes, the best option is to find a professional accountant you can trust to go through your taxes with you. You don’t have time to waste reading IRS fine print, but you don’t want to leave any of your hard-earned income behind either. Get some help and let yourself breathe easy. 

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Written by Brendon Pack

Brendon Pack is Chief Revenue Officer (CRO) at 1-800Accountant, the nation's leading accounting firm for small business. Brendon has worked ...