Taxes for the self-employed: Getting your self-employed tax return right

Is this the year you start your own business? Self-employment taxes may not be top of mind as you embark on your new venture, but there are a few considerations to be mindful of – that truthfully are very different from that of a traditional, W-2 worker – before tax time rolls around.

Let us be your guide as we cover the ropes of self-employed taxes.

What is self employment?

As the name implies, self-employment is when you work for yourself – and not an employer. The IRS defines a self-employed person as someone who carries on a business or trade as a sole proprietor, independent contractor, or partner in a partnership. You also don’t have to work full-time to be classified as self-employed, either. In fact, you can work part-time in your business venture.

What are independent contractor taxes?

Taxes for independent contractors are essentially the same as self-employed taxes. As mentioned in the list above, it’s just another term for the same classification. Another concept you may have heard of is 1099 employee taxes. This is because independent contractors and self-employed individuals may receive Form 1099 and Form 1096 for work done for a third party.

The 1099 is proof of payment from a third party that is reported to the IRS. Consider this scenario, if you don’t report income shown on your 1099-NEC under your Employer Identification Number (EIN) or Social Security number, then a major red flag will pop up to the IRS, potentially for an audit.

While the terminology you use may vary from 1099 employee taxes — to independent contractor taxes — to self-employed taxes, the process for paying your taxes is the same.

Self-employment taxes

With self-employment taxes, you incur additional tax responsibilities compared to someone with just a traditional W-2. In fact, many W-2 employees may not realize it, but their employer splits the cost of certain taxes. One half of the tax is traditionally taken out of the employee’s paychecks, and the other half is paid by the employer.

By contrast, as a self-employed person, you are responsible for paying both halves. This tax is called payroll tax, which encompasses your Social Security and Medicare contributions. When you pay both the employee and employer halves of this tax, it’s called self-employment tax, or SE tax. Other names include FICA taxes, Social Security taxes, or employer taxes.

Also, unlike being a traditional employee, you’re responsible for periodically paying the right amount of tax as a business owner. Generally, self-employed individuals make quarterly tax payments to pay taxes as they go.

Keep in mind, you pay incur late filing penalties if you don’t keep up with tax obligations as a self-employed person. So, make time to stay on top of your self-employed taxes or outsource the task.

Need help keeping up with your tax responsibilities? That’s why we’re here. Get the help of a trusted and experienced Block Advisors certified small business tax pro.

What is the self-employed tax rate?

For 2021, the self-employment tax rate is 15.3% (12.4% for Social Security tax and 2.9% for Medicare tax). You pay this amount on your net earnings – so what your profit (or loss) is after tax deductions. For 2020, the first $137,700 of your net earnings is subject to the Social Security portion – and $142,800 for 2021. You may be subject to an additional 0.9% of Medicare tax if your self-employed earnings exceed $200,000 as a single filer.

Speaking of tax deductions – this is one of the major benefits of self-employment. There are many small business tax deductions you can take to offset your taxable income. So, while the self-employed tax rate is higher, you can offset your overall taxable amount with tax write-offs.  

Remember, only the profits of the business are subject to self employment. Thus, the business expenses will lower your profit, and therefore lower the amount of self-employment taxes you’ll pay.

Self-employed tax returns

Not all solo business owners file the same self-employed tax return. The type of return and tax schedules you file depends on your business entity:

  • Self employed (no entity): If you pay self-employment tax, affix Schedule SE to your form 1040 if you earn more than $400 in business profits per year.
  • Single-member LLC or Sole Proprietor: Here, the difference between a single-member LLC vs sole proprietorship is negligible. You’ll also calculate your self-employed taxes using Schedule SE in either case.  
  • Members of a multi-member LLC or partnership: An LLC or partnership issues a Schedule K-1 (What is a Form 1065?) to its members. Then, the member files a Schedule E along with Form 1040.

Get help with self-employed taxes

As we mentioned earlier, self-employed taxes are generally more involved than that of a traditional W-2 employee. So, take the pressure off of yourself and let us help. Get back to what you love and let us guide you with your self-employment taxes, bookkeeping, payroll, and business registration needs.

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