Taxes for Self-Employed

This is my first year being self-employed and the first year I’m having to pay my own taxes. If you thought having taxes deducted from your paycheck was awful, paying self-employment taxes is worse. When your employer pays your taxes for you (by withholding them from your income), you never really have the money, you just see the evidence of it being taken away from you. As a freelance writer (or other self-employed individual), you receive the money and then you have to pay it out, just like any other bill, except it’s much higher.

Self-employment taxes are 15.3% of your net business income. That is, your income minus any business expenses. If you have $1000 per month in receipts, $100 in business expenses, your net business income is $900. Your self-employment tax for that month is $137.70.

Since there is no tax withholding for self-employed individuals, you’re expected to send your estimated income tax payments to the IRS on a quarterly basis. Not only do these payments include your self-employment tax, they should also include your federal income tax payment, too. Federal income tax is also based on your income, but your tax rate goes up as you make more money. For example, if you make less than $8,350 in the 2009 tax year, your federal tax rate is 10%. If you make more than $8,350 but less than $33,950 then your tax rate is 15%.

There are a series of calculations you must do to come up with your quarterly tax payments including subtracting your deductions, exemptions, and other credits. These things lower your tax liability and the amount you have to send for estimated tax payments. Use IRS Form 1040-ES to calculate your estimated tax payment and find out where to send your payment. You could face a penalty if you don’t pay enough taxes during the year.

The IRS does allow you to take an above-the-line tax deduction for half the self-employment tax you paid during the tax year. This means you get to reduce your taxable income by that amount whether you itemize or not. In the example above, your gross income would have been $12,000 and you would have paid $1652.40 in self-employment taxes. You would be able to adjust your gross income by $826.60 leaving only $11173.40 subject to federal taxation.

Your state may also have self-employment taxes that you should send in. Check with your state’s department of revenue to find out.

For more information about self-employment taxes, consult your attorney, CPA, or tax preparer.