Self-Employment Taxes: An Intro Guide to Get You Started

You may have stepped into the world of entrepreneurship by starting your own business. Whether you opened your own online boutique, began freelancing your graphic design skills, or drove for a ride-share company, you have a variety of tax implications to consider – and some of them can reduce your tax bill.

But how do you go about filing taxes as a self-employed person? It’s not as complicated as it might seem. With this guide, you can learn the ropes and prepare yourself for filing your self-employed taxes. 

What are self-employment taxes?

Self-employment (SE) taxes include Social Security and Medicare taxes. In a traditional work setting, your employer would withhold these taxes for you. But since you’re acting as your own employer, you’ll need to set money aside to pay for these taxes when you file your personal income tax return.

That said, not everyone is required to pay SE taxes. As of 2024, individuals who have self-employed net earnings of $400 or more will have to pay SE taxes.

Who pays self-employment taxes?

The IRS uses simple guidelines to determine who’s an employee and who’s an independent contractor. If you meet these guidelines, you’re considered an employee:

• Your employer has control over what you do and how you do your job.
• Your employer controls most business aspects of your job — which includes how you’re paid, who provides tools and supplies, and more.
• You receive employee-type benefits, such as insurance and vacation pay as well as remaining with the company..

If you operate as an independent contractor, you provide services that aren’t controlled by an employer. In this situation, a different set of rules apply to you when it comes to taxes.

How to calculate self-employment taxes

If you’re going from being an employee to self-employed, the switch will have an impact on your taxes. Start by making sure you have all the forms you need to file your taxes — Form 1099-NEC is the most important as it is used to report the income you have been paid by your customers. You can use our tax calculator to save time and determine how much your tax liability may during the year.

As a self-employed individual, you have to pay:

• Federal income tax
• Social Security tax
• Medicare tax

In some states, you have to pay state income tax on top of your federal taxes.

In total, the self-employment tax rate is 15.3% of your gross income. This breaks down to 12.4% in Social Security taxes and 2.9% in Medicare taxes.

You also have to pay federal income tax, which is based on a marginal tax rate. Federal income tax rates range from 10% to 37%. Depending on how much you earn, portions of your income will be charged at the corresponding rate for each tax bracket.

For example, in 2024, the first $11,600 of single taxpayer’s income is taxed at 10%, but earnings of $11,601 to $47,150 are taxed at 12%. Say you earn $40,000 a year from your freelancing; $11,600 would be taxed at the 10% tax rate, and the remaining $28,400 would be taxed at 12%.

Being on the hook for all these taxes can be financially intimidating, but the good news is that you‘ll be able to reduce self-employment taxes with tax credits and deductions.

Maximizing your deductions and credits

Some of the most common deductions and credits for self-employed individuals include:

Home office deduction

Working from the comfort of your own home can help you maximize your tax write-offs. If you regularly and exclusively use a home office specifically for your business, you can claim the home office deduction related to that space.

Expenses that may be deducted as part of the home office deduction include a portion of home-related expenses like real estate taxes, mortgage interest, rent, utilities, and insurance, based on the square footage of your home office space. You can also deduct the entire cost of repairs and painting needed for your home office.

Part-time hires

Are your kids out of school on holiday or a school break? Hire them! Sole proprietors who hire their kids to run deliveries, clean the office, answer phones, or enter data can deduct those wages on Schedule C, as long as the compensation is reasonable for the type of work performed.

Wages paid to children are exempt from Social Security and Medicare taxes if they are under 18. They also aren’t subject to federal unemployment tax if they are under 21. It’s also likely that your child won’t owe income taxes on these wages (since they will be below the filing threshold), which lowers your family’s overall tax bill considerably.

Retirement planning

Opening a retirement plan can help lower your taxable income. The most common retirement plan for self-employed individuals is a Simplified Employee Pension Plan (SEP). You can put in up to the lesser of 25% of your net earnings from self-employment or $66,000 for 2023 or $69,000 for 2024 up until the extended October 15 tax deadline if you filed an extension. 

Compare that to the cap on IRA contributions–$6,500 ($7,500 if 50 and over) for 2023, and $7,000 ($8,000 if 50 and over) for 2024. These traditional IRA contributions also have to be made by the April 15 tax deadline.

Mileage is money

Employees of a regular nine-to-five job cannot deduct the cost of driving to and from work.  In contrast,if you’re self-employed and driving to see a client, heading to a meeting, or going to work from another location, you can deduct these costs.

You can claim 65.5 cents per mile for business miles driven in 2023 or 67 cents per mile in 2024, plus the cost of parking and any tolls you paid. Be sure to track your business mileage so that you have substantiation for your mileage deduction.

Business trips

Tip for the traveling pros: If you’re flying to another U.S. city primarily for business, you can deduct 100% of the travel costs. Remember that while you are traveling, you can also expense your hotel or lodging and your meals, though this can only be deducted for the days you’re spending on business.

Health insurance

Most employers include health insurance in your benefits package, but how does that work if you’re self-employed?

Since you have to pay your own health and dental insurance premiums, you may be eligible to deduct those premiums on your taxes. Your health insurance deduction can’t exceed your self-employment income.

As a self-employed taxpayer, you qualify for the self-employed health insurance deduction whether you claim the standard or itemized deduction.

Think you might qualify for these write-offs and more? Try our deductions calculator.

How to file self-employment taxes

Filing self-employment taxes for the first time can be overwhelming, so we’ll walk you through the basics.

There are typically three forms you need to file when you’re self-employed: Form 1040, Form 1040 (Schedule C), and Form 1040-SE. You can attach the additional forms to your 1040 when you file your taxes.

• Form 1040 is used to report your overall individual income and deductions for the year and is used to calculate your overall tax liability or refund.
• Form 1040 (Schedule C) is where you report your net profit or loss from business. You can determine your net profit or loss by subtracting your expenses from your gross revenue.
• Form 1040-SE is used to figure out how much you owe in self-employment taxes. The Social Security Administration uses this form to calculate your benefits based on your contributions.

Any tax write-offs or deductions you claim will be included on your 1040. Depending on which credits you’re claiming, you may need to file additional forms specific to those credits with your tax return.

Paying self-employed taxes

Being self-employed means you have to pay your own taxes. Since you don’t have an employer withholding them for you, you need to pay estimated taxes throughout the year. If you expect to owe at least $1,000 in taxes when you file your return, you should make sure you’re completing these payments every quarter.

You can use Form 1040-ES to figure out how much you owe in estimated taxes. You’ll need your adjusted gross income (AGI), taxable income, taxes, deductions, and tax credits for that year.

There are four payment periods for estimated taxes. Estimated tax payments are due:

• April 15 (for the January 1 to March 31 period)
• June 15 (for the April 1 to May 31 period)
• September 15 (for the June 1 to August 31 period)
• January 15 of the following year (for the September 1 to December 31 period)

You can pay your estimated taxes by mail when you file your 1040-ES. For a more convenient option, you can pay online or use the IRS2Go app on your phone. You can also pay your estimated taxes by calling the IRS. For payments via mail, the U.S. postmark date is the payment date.

No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed. 

You can also use QuickBooks Self-Employed to track your income, expenses and mileage, and you can capture receipts year-round and then transfer your business information to your TurboTax Self-Employed tax return, making tax-time a breeze.