Editorial Note: We earn a commission on partner links on Forbes Advisor. Commissions do not affect the opinions or ratings of our editors.
Navigating the tax filing process when you’re self-employed can be daunting, especially for a beginner. If you’re not sure how self-employment taxes work or wondering what tax documents you need to file, you’ve come to the right place. This guide demystifies what you need to know about reporting income you earn outside of a traditional 9 to 5.
Featured Tax Software Partners
Federal Filing Fees
Who must report self-employment income?
Part-time and full-time workers who earn $400 or more in net self-employment income, that is, self-employment income after expenses, must report that money to the IRS, and the income may be subject to self-employment taxes.
Not sure if any of this applies to you? “Self-employed” is a term that describes workers who are sole proprietors, independent contractors or members of a partnership. Freelancers include freelance writers, photographers, designers, and drivers for ride-sharing services like Lyft and Uber.
As a self-employed person, you may receive 1099 tax forms from clients detailing what you earned, and you can use them to file your tax return. But if you don’t get a 1099, the IRS still expects you to report your income and pay the self-employment taxes you owe.
What is the self-employment tax?
If you work for yourself, you must pay a 15.3% self-employment tax on your earnings to support Medicare and Social Security programs. The tax is added to your income taxes.
When you work for a traditional employer who documents your earnings on an IRS Form W-2, your employer pays half of your Medicare and Social Security taxes, which is 7.65% of what you earn. and you pay the other half. But when you are your own boss, you are responsible for the entire 15.3%.
One consolation is that you may be able to get an income tax deduction for 50% of the self-employment tax you pay, giving you a bit of tax relief.
4 Steps to Filing Self-Employment Taxes
Filing self-employment taxes is quite simple. You basically tell the IRS how much you earn and subtract business expenses from that amount. Then you calculate the tax you owe and pay it. Here is an overview of the process:
1. Count your income
Gather all of your 1099-NEC forms to add up your total “non-employee” compensation. If you don’t get a 1099 (or are missing a few), you should still include income from all sources on your tax return.
2. Pull Records for Business Expenses
Next, gather financial statements, invoices, and receipts that show how much you spend on your business over the course of a year, as you’ll want to deduct your costs. Examples of deductible business expenses include gas and car maintenance if you drive for Uber, or office supplies and internet service if you run an online business.
Note that you can only deduct expenses that are ordinary and necessary to operate your business, not personal expenses.
3. See what tax deductions you are entitled to
Common business expenses aren’t the only deductions self-employed people can take to reduce their taxable income. If you contribute to a traditional IRA, SEP-IRA, or SIMPLE IRA, those payments may also be deductible. The same applies to payments to a health insurance plan for yourself and your dependents.
4. Complete the necessary tax forms
Self-employment income and taxes are reported annually on IRS Form 1040. Self-employed individuals who do not use tax software should generally also complete the following schedules and include them in their returns:
- Schedule C (Business Profit or Loss): Here you will list your business income and expenses to determine the net profit or net loss of your business.
- Schedule SE (self-employment tax): Schedule SE is used to calculate your self-employment tax, taking into account your net profit or loss from Schedule C.
- Schedule 1 (Additional Income and Income Adjustments): You report your business profit or loss on Schedule 1 and use this form to claim several self-employment deductions, including self-employment health insurance debarment.
The best self-employed tax software will complete these schedules for you and attach them electronically to your return when it is filed.
Or, you can hire a tax professional to gather the documents for you.
When and how to make quarterly tax payments
Because tax is not withheld from paychecks, self-employed individuals who expect to owe $1,000 or more in tax for the year are required to estimate and pay taxes on a quarterly.
Use the IRS’ estimated tax worksheet, Form 1040 ES, to determine your estimated payments.
Once you’ve done the math, you can send estimated amounts by check or make payments online through the IRS’ Electronic Federal Tax Payment System (EFTPS) each quarter. Payments for each previous quarter are due on April 15, June 15, September 15 and January 15.
Not paying or underpaying taxes during the year can result in a tax penalty, so it’s a good idea to put quarterly payment dates on your calendar. Talk to an accountant if you have questions about what you owe.
Earning money on your own terms outside of a 9-5 job can be rewarding, but self-employment taxes can be difficult to understand and expensive.
Tax planning throughout the year can make filing taxes less painful. Avoid a surprise tax bill in April by reviewing business expenses throughout the year, researching tax deduction opportunities, and tracking your estimated quarterly tax payments.
Compare the best tax software of 2022