Filing & Paying Taxes When You’re Self-Employed

Being self-employed can bring you great power, but also great responsibility. Therefore, it is important to remember the tax obligations that come with being your own boss.

Income Tax

Federal income tax is based on a pay-as-you-go system, which means you must pay tax as you earn/receive income during the year. Employees will generally have income tax withheld from their wages by their employer. But if you are self-employed (with no employer to withhold tax from your paychecks), you will need to make estimated tax payments during the year instead.

Self-Employment (SE) Tax

SE tax is basically a Social Security and Medicare tax that targets individuals who work for themselves. SE tax is similar to the Social Security and Medicare taxes that are withheld from the paychecks of most wage earners. Your payments of SE tax contribute towards your coverage under the Social Security and Medicare systems.

Generally, whenever self-employment tax is mentioned, it refers only to the Social Security and Medicare taxes, and not income tax. SE tax is reported on Schedule SE (Form 1040) and filed with your annual tax return.

The SE tax rate is 15.3% (12.4% Social Security tax plus 2.9% Medicare tax) and it applies to your net earnings. You must pay self-employment tax and file Schedule SE if either of the following applies to you:

• Your net earnings from self-employment were $400 or more (excluding church employee income)
• You had church employee income of $108.28 or more

There is a limit on how much of your income is subject to the 12.4% Social Security part of SE tax. For 2014, only the first $117,000 of your earnings is subject to the 12.4% Social Security part of the SE tax. For 2015 only the first $118,500 of your earnings is subject to the 12.4% Social Security part of the SE tax. However, the 2.9% Medicare part of SE tax will apply to all of your net earnings.

Note that you may also have to pay Additional Medicare Tax if your self-employment income exceeds the applicable threshold for your filing status.

Estimated Tax Payments

When you are self-employed, you don’t have an employer withholding taxes on your behalf. Therefore, you are expected to make quarterly estimated tax payments to cover your Social Security, Medicare, and income taxes for the year. Estimated tax is paid in 4 equal installments using Form 1040-ES (Estimated Tax for Individuals).

Generally, you must file quarterly estimated tax if you owe the IRS at least $1,000 in tax for the year. Use the Worksheet on Form 1040-ES to determine if you are required to make estimated tax payments.

If this is your first year as a self-employed person, you will have to estimate the amount of income you expect to earn during the year. If your estimated earnings end up being too high or too low, simply fill out another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter.

Filing an Annual Income Tax Return

You are required to file an annual tax return if your net earnings from self-employment were $400 or more for the year. (If your net earnings from self-employment were less than $400, you may still need to file a return, depending on your situation. For more information about IRS filing requirements, see the Instructions for Form 1040.)

Your tax return, Form 1040 (U.S. Individual Income Tax Return), for calendar year 2015 is due by April 15, 2016. (But if you use a fiscal year, your tax return is due by the 15th day of the 4th month following the end of your fiscal year.)

To file your income tax return, you should use Schedule C (Profit or Loss From Business) to report your profit/loss from a business you operated as a sole proprietor.

To report your Social Security and Medicare taxes, file Schedule SE (Self-Employment Tax) with your tax return.

For more information about filing and reporting taxes as a self-employed individual, see IRS Publication 334 (Tax Guide for Small Businesses).


If you need more time to file your tax return, you can request a tax extension online.