Frequently Asked Questions about Self-Employment and Taxes

Self-employment offers many benefits, but taxes can seem like a bigger burden. Here are some FAQs with detailed answers.

Key takeaways:

• Eight self-employment tax FAQs:
  1. Am I considered self-employed by the IRS?
  2. What is self-employment tax?
  3. Do I have to pay quarterly taxes?
  4. How do I figure out how much to pay quarterly?
  5. How do I pay quarterly taxes?
  6. Do I still have to file an annual tax return?
  7. Can I take the home office deduction?
  8. What business expenses can I deduct?

When individuals take the path of self-employment, they gain flexibility and can pursue what they’re really passionate about. But many new entrepreneurs quickly get into headache territory when tax season rolls around. And self-employed workers have to worry about taxes all year long, not just in the spring. 

You likely have questions about self-employment taxes if it’s your first time trying to understand how it all works. Here is a list of the most common questions (and answers!) concerning self-employment and taxes:

1. Am I considered self-employed by the IRS?

The IRS outlines specific guidelines for workers to be considered self-employed, including the following:

• You are a sole proprietor or independent contractor carrying on a trade or business
• You are part of a partnership carrying on a trade or business
• You have a part-time business or are otherwise in business for yourself

Self-employed individuals are not regular employees of a company who receive a W-2. Instead, you’ll typically, though not always, receive 1099s from the clients you do business with that report your income. Income received through a third-party payment processor (such as PayPal or Upwork) may not generate a 1099 unless specific payment and transaction thresholds are met—but self-employed individuals must still report this income.

2. What is self-employment tax?

When you work for a company, taxes are withheld from your paycheck to cover Social Security and Medicare taxes. Further, an employer pays half of this burden. This doesn’t happen when you earn money on your own, so you’re required to pay the total self-employment tax to cover these obligations. 

The self-employment tax rate is currently 15.3%, which consists of:

• 12.4% for Social Security
• 2.9% for Medicare

This tax is in addition to the income tax you pay on what you earned. Fortunately, you’re allowed to claim an income tax deduction for half the self-employment portion when filing a tax return.

3. Do I have to pay quarterly taxes?

Estimated quarterly taxes are something you need to become familiar with as a self-employed worker. Because you don’t have an employer making regular tax payments along with paychecks throughout the year, you have to pay them yourself. 

They’re called “estimated taxes” because you can really only estimate what you’ll end up owing for a year. They are paid quarterly by the following dates:

• April 15
• June 15
• September 15
• January 15

These dates may vary slightly from year to year, so always check the IRS website. For instance, for 2022 taxes, the first payment is due on April 18, 2022, and the last on January 17, 2023.

If you earn money throughout the year from self-employment and fail to pay sufficient estimated taxes each quarter, you’ll incur a fee from the IRS. 

4. How do I figure out how much to pay quarterly?

Estimated quarterly taxes are usually determined by last year’s income. But you can also estimate what you will make in a given year and must pay at least 90% of the actual, eventual total to avoid a penalty, though the IRS has lowered this threshold in some tax years. First, you’ll need to know your tax bracket for the applicable tax year, which tells you the percentage of income tax you pay plus the 15.3% self-employment tax.

So, say you bring in $80,000 in gross self-employment income, and you are a single filer. You would pay a 22% tax rate, totaling 37.3% for all your tax obligations for the year. So, on its face, you would then divide your expected income for the year by four and pay that percentage each quarter.

However, remember that you will have deductions to take that significantly lower your income. You’ll deduct all the business expenses you think you’ll have for the year from your total annual income and then also may take the standard deduction, which is $12,550 for single filers for 2021. So you end up paying a lot less in quarterly taxes after all these deductions since your income is substantially lower.

IRS Form 1040-ES helps calculate estimated quarterly taxes, so read through those instructions for a more detailed guide to calculations. 

When you file an annual tax return, you’ll receive vouchers from the IRS with estimated payments you can make for the following year’s quarterly taxes based on your income from that year. Don’t forget to also pay quarterly taxes to your state, in addition to federal taxes.

5. How do I pay quarterly taxes?

Use Form 1040-ES to pay quarterly taxes. You can also pay them by sending your payment with the vouchers you received from the IRS.

The IRS also has an easy online system—the Electronic Federal Tax Payment System (EFTPS)—that allows individuals to pay quickly. And you can make a quick online payment using Direct Pay from your bank account.

6. Do I still have to file an annual tax return?

Yes! If the net earnings from self-employment activities were $400 or more, you’re required to file an income tax return. You will report all actual income based on the 1099s and other tax forms you receive as well as all of your business expenses. You’ll either have to pay additional tax based on how much you paid quarterly or get a refund if you overpaid.

7. Can I take the home office deduction?

If you use a portion of your home for your business, you may be able to take the home office deduction. You must use the space exclusively for the business and on a regular basis, and it must be your principal place of business. For 2021, the simplified deduction method involves calculating the square footage of your office and multiplying it by $5. The maximum allowed is 300 square feet.

8. What business expenses can I deduct?

According to the IRS, business expenses need to be “both ordinary and necessary” to qualify. This means they are common and accepted in your industry and are helpful and appropriate for your trade or business. The most common deductible business expenses are:

• Office supplies
• Home office 
• Health insurance
• Automobile costs
• Loan interest
• Utility costs
• Startup costs
• Advertising
• Business insurance 
• Self-employment taxes
• Continuing education
• And others

The qualified business income (QBI) deduction is a newer benefit that allows you to write off a portion of your business income. If your total taxable income is $164,900 or below for single filers, you may qualify for the 20% deduction in 2021.

Provident CPA and Business Advisors helps our clients pay the least amount of tax legally possible while assisting business owners as they implement comprehensive growth strategies. Contact our experienced team to learn more about our services.