How to File Self-Employment Taxes Step by Step

Last updated 03/15/2024 by

Summary:

Self-employed individuals must file their own taxes each year. It can be a daunting task, but with careful planning and execution, it can be done. The most important thing to remember is to keep good records of your earnings and expenses throughout the year. This will make paying taxes much simpler come tax time.

If you’re self-employed, then you’ll need to file your taxes a little differently from people with employers. There are a few more steps, and it can be a little confusing if you’re not used to doing it. But don’t worry, we’re here to help.

In this article, we’ll walk you through the process step-by-step, so you can feel confident when it comes time to file self-employment taxes this year. First, we’ll start with some basics — like how much money you need to make in order to file taxes — and then we’ll move on to the specific steps involved in making your payments.

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How do I file self-employment taxes?

Filing self-employment taxes can seem complicated and confusing, but it is doable. Here are some simple steps that you can use to file your self-employment taxes when they’re due.

1) Figure out your business entity type

Before you begin your self-employment journey, it’s essential to determine which type of entity will work best for tax purposes.

Here are the five most common business structures:

Sole proprietorship. A company owned and run by a single person. The sole member contributed all funds to start the business and therefore receives all of the profit.
Partnership. A structure comprised of two or more business partners. Each partner contributes something to the company—this could be money, labor, or even knowledge—and in return shares a portion of the company’s profits and losses.
Corporation. It may be run by one or more shareholders. The shareholders contribute to the company, similar to a partnership, and receive company stocks in return. Any of the corporation’s profits are taxed before being distributed to the shareholders, where the profits are taxed again as dividends.
S-Corporation. Similar in structure to a corporation. However, an S-corporation passes all income and losses through shareholders to avoid the double tax corporations experience.
Limited liability company (LLC). It may be run by one or more members. Members contribute to the LLC in exchange for a membership interest in the company. LLCs are taxed differently depending on the state, so be sure to check with your location’s Secretary of State office for more information.

The type of business entity you have determines which income tax return form you have to file. For example, if you are a sole proprietor, you have to file Schedule C with your Form 1040. If you are a corporation, you have to file Form 1120. If you’re unsure about which form to file, make sure to visit the IRS’s page to find the correct form you need.

2) Gather your 1099 forms

When you work for yourself, there are a few more tax forms to gather and file before tax season. The most important of these is the 1099 form. This document lists all of the payments made to you during the year as an independent contractor. If you don’t have this information together before filing your self-employment taxes, you could be in for a long wait with the IRS.

It might seem like a tedious task, but gathering your 1099 forms before you file your self-employment taxes is an absolute must. Filing without them could potentially result in penalties and interest charges due to underpayment.

What is the self-employment tax form 1099?

The Internal Revenue Service requires that you report all of your earnings as income. If you are an employee, this will be reported on a W-2 Form. However, if you are self-employed or work for yourself, then you’ll most likely need to use the tax form 1099.

To put it simply, the 1099 form is a record that an entity or person other than your employer paid you money. This type of income is subject to self-employment taxes, which are similar to the Social Security and Medicare taxes that employees pay.

3) Decide whether to hire a tax professional

Hiring a tax professional to file your self-employment taxes for you can take a huge weight off your shoulders. They will take care of all the paperwork for you and make sure that everything is filed correctly and on time. This can also save you the hassle of having to file back taxes in the future. Moreover, you might be able to get expert advice on how to save money by taking advantage of deductions or credits specific to the self-employed.

However, it can also be expensive to hire a tax professional, especially if you don’t currently have the budget. So it’s important to weigh the pros and cons before making a decision.

4) Consider deductions you’re eligible for

When you’re self-employed, it’s important to be aware of all the tax deductions you’re eligible for. This can help reduce your taxable business income and ultimately save you money. Here are four common self-employment tax deductions that many people may not be aware of:

Home office deduction. To qualify for a home office deduction, the taxpayer must use a portion of their home exclusively for business purposes.
Business mileage. This can include driving to and from client meetings, delivering supplies or products, or traveling to other business-related destinations.
Internet and phone deduction. This allows taxpayers to deduct the costs of their internet service and phone service from their taxable income.
Self-employment health insurance deduction. Self-employed taxpayers can deduct the premiums they’ve paid on a health insurance policy covering medical care.

5) Determine your net profit

If you’ve decided to figure out how to pay self-employment tax yourself, then the next step is to figure out your net income. This is easy if you’ve been keeping track of all your gross earnings and expenses throughout the year. If not, it might take a little digging into old receipts or bank statements.

Once you have that information ready, multiply your net income by 92.35% (this is the percentage of your net profit that is subject to self-employment tax). The number that you end up with will be “Line 3” on your Estimated Tax Worksheet. Then, by referring to the worksheet, you can use this number to figure out how much estimated tax you’ll be paying this year.

Calculation page from Form 1040-ES

6) Make quarterly payments on time

When you’re self-employed, you have the responsibility of paying your quarterly self-employment taxes on time to the IRS. This is in addition to filing an annual tax return. The quarterly payments are due on April 15, June 15, September 15, and January 15 of the following year.

Pro Tip

Whenever possible pay your estimated taxes by the due date of each of the payment periods. If you don’t, you may be charged a penalty even if you are due a refund when you file your income tax return.

Some self-employed individuals might be under the impression that they don’t need to make estimated tax payments to the IRS. But if you don’t report your business income and pay your taxes, there will be penalties and interest charges that may even lead to criminal prosecution.

All in all, avoid these headaches by keeping track of how much tax is owed each quarter and when payment deadlines are. The general rule is that you must pay either 90% of this year’s total expected tax or 100% of the tax liability that appeared on the previous year’s return through either withholding or estimated taxes

Estimated state taxes

Self-employed workers who live in US states with income tax — all states except Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — also need to make estimated tax payments using the same deadlines as with federal taxes.

Check with your state’s department of revenue (or talk to your tax advisor) for more details. For example, if you live in California, the rules are similar to federal taxes. You must make estimated payments when expect to owe at least $500 ($250 if married filing separately) and you predict your withholding and tax credits will not cover at least 90% of this year’s tax liability or 100% of the previous year’s tax (whichever is smaller).

Tax preparation programs, make it easy for most taxpayers to calculate their own tax liability and estimated quarterly taxes.

7) Complete IRS schedule C

The Schedule C (1040 form) is for self-employed individuals or independent contractors to file their annual tax returns. This form is used to report income and expenses related to a business that you operated during the year. The resulting number is what you’d then use to calculate how much self-employment tax you owe on Schedule SE.

FAQs

What is self-employment tax?

Self-employment tax is a tax that self-employed individuals pay on their net earnings from self-employment. It is similar to the social security and Medicare taxes withheld from an employee’s wages.

Currently, the self-employment tax rate is 15.3%. This rate includes 12.4% for social security and 2.9% for Medicare taxes. In 2021, self-employed individuals are required to pay the 12.4% social security tax on the first $142,800 of their net earnings. However, all of their net earnings are subject to the 2.9% Medicare tax.

Can you get a tax refund if you are self-employed?

Yes! If you’ve made a mistake on your tax return and ended up paying more than you should have, then you’re entitled to a tax refund.

Make sure to deduct all relevant business expenses to help cut both self-employment tax and federal income tax. This will help you receive a larger refund. Some of these business expenses may include home office or equipment expenses.

Form 1099 vs. 1040: What’s the difference?

If you are self-employed, chances are you’ll receive a Form 1099 and a Form 1040 to fill out at some point in your career. However, these two forms are not interchangeable and can be confusing for some people when filling out their tax forms.

Form 1040 is the individual income tax form that self-employed individuals complete each year to file taxes. On the other hand, Form 1099 is the form that employers use to report the amount of money they have paid a person during the year. Simply put, it’s what you would receive from any client who has paid you for your service during the tax year.

How do I report self-employment income without a 1099?

Even if you don’t receive a 1099 form from your clients or customers, you must still report your sources of self-employment income to the IRS. What you can do is make sure you’re estimating how much you owe as accurately as possible. If you’ve done your best to fill out Form 1040-ES and make those quarterly payments, then you shouldn’t worry too much about receiving a tax penalty for not paying taxes.

How much do I need to make when self-employed to file taxes?

You don’t need to make a lot of money to be considered self-employed and file taxes. In fact, as long as your net earnings are $400 or more in a year, the IRS considers you a business owner and you need to start paying self-employment tax.

Depending on your income and deductions, there are a few different ways to file self-employment taxes. However, conducting proper research or consulting with a reliable accountant are the best ways to make sure you’re paying the correct amount.

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