What is self-employment tax?
You’ve likely worked for someone else before, so you’re undoubtedly familiar with how tax withholding impacts your paycheck.
Your employer deducts taxes from your gross income or salary each pay period and sends them to federal, state and local agencies to fulfill your obligations. At tax time, you receive a W-2 summarizing these deductions to help determine if you owe money or could expect a refund from the Internal Revenue Service (IRS).
Now that you’re in business for yourself, self-employment tax rules take on a different form and filing process: You’ll need to handle both income tax (ranging from 10% to 37%) and the self-employment tax rate on your net income.
What is the self employment tax rate?
As an employee, you and your employer split the cost of Social Security and Medicare taxes. But the tax for self-employed people requires you to wear both hats — which means you’re responsible for the entire 15.3% yourself (broken down as 12.4% for Social Security and 2.9% for Medicare).
Essentially, you’re your own employer, and you’ll pay yourself, calculate your self-employment taxes, and make sure your tax funds get to the appropriate agency.
But there’s a catch: The IRS doesn’t want you to wait until tax day to pay one big bill. Instead, the IRS requires you to estimate and pay these taxes four times throughout the year. Missing these quarterly deadlines can result in penalties, even if you pay the full amount by tax day.
What are quarterly tax payments?
It’s been said that there are only two certainties in life — death and taxes. Both are inevitable, but small business taxes don’t have to be overwhelming. Quarterly tax payments are your way of spreading out your tax obligations rather than forking over a big bundle of cash when a final income tax return is due.
Naturally, your revenue may change from year to year, so the best practice you can adopt is to estimate your self-employment tax payments based on past net earnings (and perhaps add a cushion for potential revenue growth).
Strategically planning for what you will ultimately owe to the federal government at year-end makes good fiscal sense. It helps you:
- Better manage your business cash flow
- Avoid hefty underpayment penalties
- Budget more effectively for tax season
Mark these dates: The quarterly tax payment schedule for the self-employed
The IRS expects self-employed quarterly tax payments. You’ll want to circle these four payment deadlines on your calendar:
- April 15 (for income earned from January 1 to March 31)
- June 15 (for income earned from April 1 to May 31)
- September 15 (for income earned from June 1 to August 31)
- January 15 (for income earned from September 1 to December 31)
While these deadlines generally stay the same each year, the date might shift if it falls on a weekend or holiday. Review the estimated tax due dates from the IRS and set reminders a few weeks ahead to give yourself plenty of time to calculate and submit your payments.
If you’re not sure how much to pay, your best bet is to work with an accountant or tax professional. You can also use a self-employed tax calculator, like this one from QuickBooks, to get a general sense of your quarterly payments.
Self-employed tax credits and deductibles to reduce your tax bill
You’ve got more control over your tax situation than you might think. Besides needing to pay quarterly self-employed taxes, you can also take advantage of self-employed tax credits and small business tax deductions.
Most legitimate business expenses can reduce your taxable income, and a little strategic planning can make a big difference in your tax bill.
As the year progresses, you may determine, through self-analysis or a consultation with your accountant, that an investment in the business may help boost your competitive advantage and reduce your taxable income. For example, purchasing a piece of capital equipment or vehicle toward the end of the year, if feasible, can provide a considerable tax deduction and a potentially smaller tax payment to the IRS.
Another way to reduce your taxable income is by paying business insurance premiums. Business insurance protects your business, but the premiums also qualify as a tax-deductible expense that could lower your self-employment tax.
Business insurance is tax deductible
Smart business insurance does double duty — it protects your business while reducing your taxable income. Here are the key types of business insurance taxpayers can deduct from this tax year:
Self-employment tax calculator for quarterly tax payments
Calculating estimated tax payments isn’t an exact science, but you want to get it right because you could incur an IRS penalty for underpaying self-employment tax estimated payments.
The best practice to adopt is following the guidelines a tax professional sets — or the amounts generated by tax-filing software.
We have a step-by-step guide to calculate and pay self-employment tax, but here’s how to get started:
- Look at your previous year: The simplest starting point is last year’s tax bill. For example, if you paid $24,000 total last year, plan to set aside at least $6,000 for each quarterly payment this year.
- Consider your current growth: If you’re expecting higher earnings, set aside extra to avoid surprises. Let’s say your business is growing, and you might owe $30,000 this year instead of $24,000. Consider adjusting your quarterly payments up to $7,500 each.
- Track your actual earnings: For tax purposes, monitor your income throughout the year to spot any major changes that might affect your tax obligations.
Tip: Even if your business grows significantly, you typically won’t face underpayment penalties if you match last year’s quarterly payment amounts. Get tax advice and legal advice from a professional tax expert to help you set the most accurate amounts for your situation.
