How To File Taxes Self Employed
How To File Taxes Self Employed With 3 Easy Tips
If you have a side gig as a freelancer or maybe you’re a small business owner operating as a sole proprietor, you now are or soon will be subject to self employment taxes. In case you aren’t sure what these are, we’ll show you how to file taxes self employed.
What are self employment taxes?
To begin with, it’s the social security and Medicare taxes that are assessed on the net profit of your gig or small business. If you were working for someone else, you pay one half, or 7.65% of your gross wages, and your employer would pay 7.65% as well, for a total of 15.3%.
Since you are technically working in the same capacity, you are required to pay the total amount on the net profit of your business. You do get a small break, though, in filing taxes for self employed, as we’ll show you in the actual calculation later.
Each year, only a certain amount of earned income is subject to the social security portion. In 2020, the maximum amount of earned income subject to social security taxes was $137,700. Usually It increases each year and for the year 2021, it jumps to $142,800. It should be noted that there is no cap on the Medicare portion.
In addition to these caps, there is an extra tax for high income individuals. If your net earnings from working as an independent contractor exceeds $200,000 for a single taxpayer or $250,000 for joint, a tax of 0.9% is levied and paid when you file your taxes.
We’ll mention another ill-named tax here that applies to high income individuals. It’s called an investment tax with the official name of the “Unearned Income Medicare Contribution Tax.” This tax is an additional 3.8% when you file your taxes. By the name of this tax one would assume that it helps to fund Medicare.
However, clever politicians have that money go into the general fund where it’s available to wasteful politicians to spend any way they like. Several years ago, one moron spent a considerable amount, $356,000, to the NIH to study the effect that cocaine had on the sex life of quails. And, that’s only a drop in the bucket, compared to other moronic studies.
How are self employment taxes calculated?
The first step is to arrive at your net self employment earnings for the year. That’s the only way to know how to file taxes self employed. Usually, it’s gross income minus allowable business expenses.
The calculation then is to multiply your net earnings by 92.35%. That result is then multiplied by 15.3%. What that boils down to is an effective tax rate of about 14.2% of your self employment earnings as independent contractor taxes.
Not everyone has high self employment income, so if yours is quite low, you might come out better if you use the other optional methods that are calculated on Schedule SE.
What are the rules to file self employment taxes?
The rules for how to file taxes self employed are quite simple. If you had net earnings of $400 or more from your gig or small business, you are subject to this tax. If you receive a 1099-NEC from anyone, the IRS usually considers you to be self employed.
Income from a church is a little different though. Clerical staff paid by W-2 is like any other business. Ordained ministers are treated differently. Unless they apply for an exemption from paying into the social security system, they are considered self employed for social security purposes.
However, for federal and state income taxes, they are considered to be an employee. When issuing a W-2, the social security and Medicare withholding blocks are blank, but the blocks for federal and state withholding have numbers. They are supposed to file estimated taxes for the social security and Medicare taxes. Many ministers just increase the federal withholding enough to cover social security and Medicare taxes.
It should also be noted that there are no age limits to have to file self employment taxes. If you have the earnings, you will pay the tax.
How to file taxes self employed
Normally, you prepare a Schedule C to report your self employment income and qualified expenses to arrive at your net earnings. After you have that number, you then use Schedule SE to calculate your self employment tax.
Be advised, however, if your total federal taxes for the year are $1,000 or more, you are required to pay the taxes by filing estimated taxes each quarter that you had income. If you wait until the end of the year, you’ll receive a penalty notice for underpayment of taxes. Those with higher income need to be aware of the 110% rule for estimated tax payments.
Self employment has some nice tax deductions
The first deduction available to you when you file self employment taxes, is 50% of that amount can be deducted from your total income, thereby lowering your overall income tax.
The Tax Cuts and Jobs Act (TCJA) enacted in December 2017, created a new deduction for the self employed and others. It allows you to take an income tax deduction of up to 20% of your self employment income. It’s known as the Qualified Business Income deduction (QBI), or the Section 199A deduction. You can learn more about that deduction here. This deduction is available from 2018 through 2025.
There are other deductions available such as a home office, health insurance, and a few more. There are certain rules that apply to how to file taxes self employed. They are fairly clear and there are benefits available to you that can help to reduce taxes.
If you want to do your own taxes, we have the best tax software for self employed people to do their taxes online for a flat fee of just $25.