Tax Issues for the Self Employed
Two of the most important tax issues that self-employed individuals should know about are the self-employment tax and estimated, quarterly tax payments. Read on for general information on both of these topics, but keep in mind that you may also want to consult a tax attorney or other tax professional regarding your specific situation.
(1) Self-Employment Tax
As an independent contractor, you don’t have taxes withheld from your paychecks by an employer; the IRS, however, makes sure that you still are responsible for income taxes like those that go to Social Security and Medicare. This is the self-employment tax, and you figure it out via Schedule SE (Form 1040).
If you made more than $400 from self-employment or you were a church employee with income over a certain amount (this amount changes, so do check the IRS site for current information), you must pay self-employment tax.
The IRS website has all the information you need on the self-employment tax, including how to figure it out and how to pay it.
(2) Estimated, Quarterly Taxes
If you are self-employed and subject to the self-employment tax, you get to pay your taxes earlier than everyone else! In fact, as discussed in greater detail below, if you meet certain conditions, you must pay estimated, quarterly taxes or face tax penalties.
Who has to file estimated, quarterly taxes?
Generally if you expect to owe more than $1,000 in taxes over the year, you should be paying estimated, quarterly taxes; this includes most self-employed taxpayers.
If you owed no taxes at all the previous year, were a U.S. citizen or resident all year, and your previous tax return covered all 12 months, you do not have to pay estimated taxes; this exception has very specific rules, though, so consult information from the IRS and/or an experienced tax attorney or other tax professional regarding your specific information.
When are estimated, quarterly tax payments due?
The due dates for estimated, quarterly tax payments are as follows:
- Payment 1: April 15
- Payment 2: June 15
- Payment 3: September 15
- Payment 4: January 15 (of the following tax year)
How do you figure out estimated, quarterly tax payments?
If you filed taxes last year, you can use your previous year’s return as guidance. Otherwise, you can either use your first quarter’s income (January through April) to estimate for the entire year and pay based on that or you can simply pay the taxes due based on your earnings for that first quarter.
Note that if you didn’t have earnings in the first quarter, you do not have to make the first payment on April 15 (the same goes for all the quarters, i.e., if you didn’t receive in come in that quarter, you do not have to make a tax payment).
What if you don’t pay estimated, quarterly taxes?
If you don’t pay the estimated tax and should have done so, you may be subject to tax penalties (the percentage is set by the IRS and changes); however, if you have paid the lesser of 90% of your total tax due in the current year or 100% more of the tax paid in the previous year, you won’t be subject to tax penalties. Note that the rules change slightly as income increases, so be sure to check current IRS provisions and/or speak to a tax attorney or other tax professional.
How do I make the estimated, quarterly tax payments?
Payment vouchers for estimated, quarterly tax payments are found in IRS Form 1040-ES (PDF); once you have made your first such payment, the IRS will send you a booklet that includes vouchers.