Working as a freelancer had its advantages: more control over your time and who you work for. No time clocks or strict dress codes. No need to fill out a triplicate form to request a half day off for that doctor’s appointment. In other words, lots of perks.
Self-employment or freelancing also has its downsides, whether you run a business with employees or are a sole proprietor. For one thing, there’s no payroll department to deduct taxes on your behalf, so it is up to you to deduct and pay your own taxes on time each year.
First, the basics…
Self-employment taxes represent the Social Security and Medicare taxes that are normally deducted from a worker’s paycheck. The employer pays half, and the employee has the other half deducted from their check each pay period. The employer submits both parts each quarter, and these are the taxes that fund the Medicare and Social Security that workers typically draw from when they reach retirement age.
If you’re self-employed, however, you’ll be responsible for both parts. In essence, you’ll be paying twice what your employer deducted from your paycheck each payday.
The IRS calculates your Social Security and Medicare taxes by using a fixed percentage based on your net income (income after expenses are deducted). Let’s suppose your net self-employment income for the year was $10,000.00. Your self-employment tax would be $1530.00 or 15.3 percent of $10,000.00.
You’ll state this amount when preparing your taxes using Schedule SE.
How to pay self-employment tax:
- Complete Form 1040, and attach Schedule C “Profit and Loss from Business” along with the Schedule SE.
- Remit your payment along with Form 1040-V (payment voucher) and include a check or money order along with the voucher.
- Mail the return to the address specified on the voucher.
If the thought of paying a lump sum each year leaves you cold, you could pay estimated taxes each quarter instead. You’ll send in 1/4 of your total tax liability each quarter. The IRS has more information on how to calculate your estimated taxes.
While there are many advantages to self-employment, the tax aspect can be a headache if you’re caught unprepared. By understanding the basics of self-employment tax, you’ll be in a better position to determine whether this is something you can deal with on your own, or if you’d benefit from consulting with a tax pro, especially during your first year of self-employment.
Either way, self-employment offers a level of freedom and flexibility typically not found with a 9-5, so if you’re in a position to strike out on your own, do so!
Just don’t forget about those pesky self-employment taxes.