Taxes When You Are Self-Employed
People who are self-employed are subject to the same federal income taxes as traditional employees. However, if you’re self-employed, you are required to pay into the Social Security and Medicare programs at a much higher rate. Fortunately, deductions exist that can considerably reduce your tax obligation.
- Written By Thomas J. Brock, CFA®, CPA
Thomas J. Brock, CFA®, CPA
Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.Read More
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Senior Financial Editor
Savannah Hanson is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.Read More
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- Updated: January 23, 2023
- 5 min read time
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What Is Self-Employment Tax?
Self-employed people — a group that can include freelancers, independent contractors and owners of small businesses that are unincorporated — are subject to a progressive income tax just like traditional employees. Essentially, this means that both self-employed individuals and traditional employees pay an increasingly higher rate of tax as they make more money. While both groups pay a progressive income tax, there is a notable difference between the tax obligations of self-employed individuals and traditional employees: the self-employment tax.
Per the Federal Insurance Contributions Act (FICA), which was implemented to ensure funding for the Social Security and Medicare programs, workers must pay a tax on all earnings received, and employers must pay a matching tax on those wages. For self-employed workers, this situation results in a double tax — one tax paid as an employee and another paid as the employer. Fortunately, deductions exist for the self-employed that can help reduce their tax burden to a level that compares to that of traditional employees.
Read on to learn more about self-employment taxes and how you should factor them into your personal finance situation if you work for yourself.
What Is the Self-Employment Tax Rate?
For the 2022 tax year, 6.2% of your gross wages are automatically deducted from each paycheck to fund the Social Security program, and 1.45% of your gross wages from each paycheck are withheld to fund the Medicare program, amounting to a total of 7.65% of your gross wages for your employee tax obligation. Your employer is obligated to match the percentages, contributing 7.65% of your gross wages to meet the employer obligation.
Self-employed individuals must pay both the employee and employer obligations, which amounts to a total tax of 15.3% on your gross wages. Fortunately, as noted previously, deductions exist that can considerably reduce the tax burden for the self-employed.
Who Has To Pay Self-Employment Tax?
According to the Internal Revenue Service (IRS), a self-employed individual is anyone that (1) carries on a trade or business as a sole proprietor or an independent contractor, (2) is a member of a partnership that carries on a trade business or (3) is otherwise in business for themselves. If you are engaged in any of these types of arrangements, you must pay the self-employment tax, assuming either of the following circumstances apply to you during a tax year:
- You had $400 or more in net earnings from self-employment (excluding anything you made as a church employee).
- You had $108.28 or more of net earnings from church employment.
The above guidelines are firm and apply regardless of your age or retirement status.
How Do You File Taxes When You’re Self-Employed?
For self-employed people, filing taxes is an involved process that requires a variety of forms and deductions, as well as the ability to navigate an array of interdependent IRS guidelines. As a result, many self-employed tax filers enlist a tax professional to do the leg work for them.
What Forms Do You Need?
If you like to do things yourself or you enjoy research, use the high-level guidance below as a starting point to figure out what tax forms you may need as a self-employed individual.
In addition to these three key IRS forms, other tax forms may come into play when you’re self-employed. At the top of the list are various 1099 forms, which are used to report income to the IRS. There are nearly two dozen types of 1099s, but those that most often pertain to self-employed individuals include Form 1099-K , Form 1099-MISC and Form 1099-NEC.
What Deductions Can You Make When Self-Employed?
When you are working for yourself, there are many self-employment tax deductions that can benefit you. The most prominent deductions are outlined below.
- Self-Employment Tax
- With this deduction, you can deduct half of your FICA tax from your net earnings when calculating your taxable income. Essentially, this reduces your Social Security and Medicare tax obligation to a level that approximates that of a traditional employee.
- Home Office
- This is a very complex deduction, covering the cost of any workspace expense you incur regularly and exclusively for your business. Essentially, this includes a portion of your rent or home depreciation, utilities, property insurance and expenses for repairs and maintenance.
- Health Insurance Premiums
- If you are self-employed and pay health insurance premiums (and you are not eligible to participate in a plan through your spouse’s employer), you can deduct all of your health, dental and qualified long-term care insurance premiums. In other situations, certain medical and dental expenses above 7.5% of your adjusted gross income may be tax-deductible.
- Other Expenses
- In many cases, you may have deductions that relate to a variety of business-related expenses, including liability insurance, advertising, travel, education, publications, subscriptions, loan interest and charitable contributions.
Do You Need To Make Quarterly Estimated Payments?
Generally, all self-employed individuals who expect to owe more than $1,000 in self-employment tax are required to pay estimated self-employment taxes on at least a quarterly basis. Not doing so can result in hefty penalties.
How to Make Quarterly Payments
The only requirement to make a payment is that you possess a social security number or an individual taxpayer identification number. You can estimate your tax payment requirements with IRS Form 1040-ES. For more information about how to pay your estimated self-employment tax, see Publication 505, Tax Withholding and Estimated Tax.
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13 Cited Research Articles
Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
- Social Security Administration. (2022). Fact Sheet. Retrieved from https://www.ssa.gov/news/press/factsheets/colafacts2022.pdf
- Internal Revenue Service. (2021, July 28). About Form 1040-ES, Estimated Tax for Individuals. Retrieved from https://www.irs.gov/forms-pubs/about-form-1040-es
- Internal Revenue Service. (2022, March 14). About Form 1040, U.S. Individual Income Tax Return. Retrieved from https://www.irs.gov/forms-pubs/about-form-1040
- Internal Revenue Service. (2022, February 3). About Form 1099-K, Payment Card and Third Party Network Transactions. Retrieved from https://www.irs.gov/forms-pubs/about-form-1099-k
- Internal Revenue Service. (2021, June 7). About Form 1099-MISC, Miscellaneous Income. Retrieved from https://www.irs.gov/forms-pubs/about-form-1099-misc
- Internal Revenue Service. (2022, February 3). About Form 1099-NEC, Nonemployee Compensation. Retrieved from https://www.irs.gov/forms-pubs/about-form-1099-nec
- Internal Revenue Service. (2022, March 1). About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Retrieved from https://www.irs.gov/forms-pubs/about-schedule-c-form-1040
- Internal Revenue Service. (2021, July 13). About Schedule F (Form 1040), Profit or Loss From Farming. Retrieved from https://www.irs.gov/forms-pubs/about-schedule-f-form-1040
- Internal Revenue Service. (2021, September 20). About Schedule SE (Form 1040), Self-Employment Tax. Retrieved from https://www.irs.gov/forms-pubs/about-schedule-se-form-1040
- Internal Revenue Service. (2022, March 15). Publication 505 (2022), Tax Withholding and Estimated Tax. Retrieved from https://www.irs.gov/publications/p505
- Internal Revenue Service. (2022, March 14). Self-Employment Tax (Social Security and Medicare Taxes). Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
- Medicare.gov. (n.d.). Homepage. Retrieved from https://www.medicare.gov/
- Social Security Administration. (n.d.). About Us. Retrieved from https://www.ssa.gov/agency/