One of the joys of being self-employed is that you’re the boss. Unfortunately, when it’s time to figure out your taxes, this means the job falls to you. You may not have an HR department to help you figure out tax withdrawals, tax obligations and other taxation matters.
Use our self-employment tax calculator to estimate your taxes, then read further to read more about your tax obligation.
Estimate the Amount of Self-Employment Taxes I Will Pay
Self-employment taxes are comprised of two parts: Social Security and Medicare. As an employee, you pay 6.2 percent and your employer pays Social Security taxes of 6.2 percent on the first $132,900 of your covered wages. They each also pay Medicare taxes of 1.45 percent on all your wages – no limit.
If you are self-employed, your Social Security tax rate is 12.4 percent and your Medicare tax is 2.9 percent on those same amounts of earnings but you are able to deduct the employer portion. You will pay an additional 0.9% Medicare tax on the amount that your annual income exceeds $200,000 for single filers, $250,000 for married filing jointly, and $125,000 married filing separate.
Do I Owe Self-Employment Taxes?
If you own your own business and are not a corporation, you are self-employed. If you are an independent contractor working for clients, you are self-employed. In these cases, you have a few obligations:
- You must file your taxes annually as a self-employed person. You can file your self-employment income on your personal income tax return.
- You must pay estimated taxes quarterly. These are due on January 15, April 15, July 15 and September 15 of each year and are based on the income you may make during the current year — which is based on your earnings the year before.
- You must pay your Social Security and Medicare self-employment taxes.
The IRS has regulations and tips for self-employed workers, but many entrepreneurs choose to work with an accountant or tax preparer to ensure they are compliant.
How Does Being Self-Employed Affect My Taxes?
One of the things you will need to do is to ensure you are paying for Social Security and Medicare. You will also need to estimate your contributions correctly. If you underestimate, you will need to pay extra in April when you file your taxes, and there will be a penalty. If you overpay, you are essentially giving the government a tax-free loan, and you have less money for your needs and your operating expenses now.
It is also important to put aside enough for taxes if you are self-employed and expect to owe at tax-time. Failing to save enough means you will have to pay even more in penalties and interest, which can impact your ability to make your next installment payment. Not having set aside enough to pay your taxes can also make it challenging for you to pay your taxes in full when they are due, which can mean fines and penalties. It can even mean you need to make a payment arrangement with the IRS.
Another thing to keep in mind is self-employment tax deductions. As an independent contractor, you can deduct any business expenses, which can help you reduce your tax burden. Make sure to keep all receipts that may help you make deductions. You are responsible for keeping this paperwork in case you are ever audited.
Self-Employment Tax Calculator to Help You Determine Your Tax Amounts
Money Help Center provides this self employment tax calculator along with much more information to help you with your pressing financial matters. Learn how the new federal income tax brackets and rates for 2020 may affect your tax liability and be sure to check out all the Money Help Center calculators today!