Whenever you have a job, your employer usually takes a certain amount of money out of your paycheck to pay for taxes such as Social Security, Medicare, and income taxes. But what about if you are self-employed? You still have to pay these taxes but the way in which you do so is a bit different than if you have an employer. Here is a brief guide on who has to pay self-employment taxes and how the amount of those taxes are decided.

Self-Employed Tax Payers

In order to be considered self-employed by the IRS, there are certain requirements that must be met. These requirements include running a trade or business as the sole proprietor or working as an independent contractor, being a member of a partnership that runs a trade or business, and being in business for yourself, even if that business is a part-time business.

Self-Employment Tax Obligations

If you are a self-employed businessperson, there are certain tax obligations that are enforced by the IRS that you will be required to complete. Usually any self-employed persons will need to file an annual tax return and pay estimated taxes quarterly. You may additionally be required to pay a self-employment tax (SE tax) and an income tax.

Whether or not you have to pay the self-employment and income tax depends on your net profit and net loss. To find these out, you will have to subtract your expenses from your income. If the amount of expenses is less than your income, the difference is net profit. This number will be considered a part of your income when you fill out Form 1040. If the amount of expenses is more than the business’ income, the difference results in a net loss. Your net loss can usually be deducted from the gross income on Form 1040. However, losses may be limited on the form.

If your net earnings from self-employment were $400 or more, you will be required to file a tax return. If you have earned less than $400 over the year, you may still have to file an income tax return based on additional requirements.

Self-Employment Tax

The self-employment tax, sometimes referred to as SE tax, is a tax on self-employed persons that refers directly and exclusively to taxes on Social Security and Medicare. The self-employment tax does not include any other taxes that any self-employed persons may have to pay such as income taxes. This tax is similar to the taxes on Social Security and Medicare that would be taken out of your paycheck by an employer.

If your earnings over the previous year were $400 or more, or $108.28 if you are a church employee, you will be required to pay the self-employment tax. To determine how much the tax will be for you, you can use the Schedule SE section of Form 1040 which will aid you in your calculations.

Making Your Quarterly Payments

If you are a self-employed person, you will be required to make quarterly tax payments in addition to your annual tax payments. To find how much you will be required to pay, you will need to use the estimated tax formulas since there are no earnings being withheld by an employer. To determine how much you will be required to pay in estimated taxes, you can use Form 1040-ES. In order to find the estimated tax that you will owe, you will need to calculate your expected adjusted gross income, your taxable income, your taxes, your deductions, and your credits. Checking the numbers from the previous year can usually help you find these figures. You will want to make sure that you are calculating these figures as accurately as possible so that you avoid any potential penalties. When it comes to paying these estimated taxes, you can consult Form 1040-ES which includes instructions on paying by mail, phone, or online.

If you work for an employer, paying your taxes is usually easy as it is often simply taken out of each paycheck. But if you are self-employed, paying your taxes is a bit more complicated. This brief guide is a jumping off point so if you are self-employed, you can better understand how you will be expected to pay your taxes. For help on paying your taxes as a self-employed businessperson, come to France Law Firm.