Tax time is approaching, and with it comes one of the only drawbacks of being your own boss—doing your taxes. If you’re new to self-employment or still haven’t quite figured out the system, working out self-employment taxes can be a complex and confusing venture.
This guide to 2019 self-employment taxes will help demystify tax time and keep things simple. From A-Z, here’s all you need to know to get things in order.
What are self-employment taxes?
Self-employment taxes are taxes paid to the Social Security Administration for Social Security and Medicare, based on the earnings of your business. The Social Security tax goes towards old-age, survivors, and disability insurance, while Medicare provides hospital insurance. You might also see self-employment taxes referred to as SECA (Self-Employed Contributions Act) taxes.
The main differences between employment and self-employment taxes are:
- Employees have their tax automatically calculated and deducted from their income by the employer. When you’re self-employed, you have to calculate your net earnings and tax due yourself.
- Since your tax isn’t automatically withheld from your pay, you’re expected to make quarterly estimated tax payments to the IRS. We’ll talk more about them later in this guide.
- Employees also split Social Security & Medicare payments with their employer, meaning they only pay half the tax rate. As both employee and employer, you’re expected to pay both portions of the contribution.
Read more: How to File Your Taxes as a Freelancer
Who has to pay self-employment tax?
Anyone whose net earnings from self-employment in 2018 were above $400 (or more than $108.28 in church employee income) needs to pay self-employment tax.
Self-employment refers to:
- Sole proprietors,
- Independent contractors,
- Partners in partnerships, and
- LLC owners.
These types of businesses are also referred to as ‘pass-through entities’, meaning the business’s profits and losses are passed through to the owner on their personal tax return.
Note: Caregivers who provide in-home services for the elderly or disabled are subject to special rules. Read more details here.
What is the 2018 self-employment tax rate?
The self-employment tax rate for 2018 is 15.3%. From this amount, 12.4% accounts for Social Security and 2.9% goes towards Medicare. The tax rate can be divided into two, with 7.65% making up the employer contributions and 7.65% the employee contributions.
You only have to pay Social Security tax on the first $128,400 you earn in 2018 (well done, you!). This is known as the Social Security wage base and will generally increase each year along with inflation (for example, last year this amount was $127,200).
The Medicare tax is always paid on the entirety of your net earnings, be it $4,000 or $4,000,000. If you’re a high income earner, you might be subject to an additional Medicare tax.
Self-employment tax deductions
You can deduct from the employer portion of your self-employment tax (7.65%) when filing your personal income tax return. This will help reduce the gross income on your own tax return, but won’t have an impact on your self-employment net earnings or tax.
Changes to the tax policy this year also introduced a new deduction for pass-through entities. This allows you to deduct 20% from your revenue before subtracting expenses to calculate your net income. You can learn more about the policy changes in this article.
Calculating your net self-employment earnings
Self-employment tax is deducted from your net income. You can calculate your net self-employment earnings by subtracting your business expenses from your total earnings for the year. Business expenses could include anything from internet access and co-working spaces to software and purchased inventory.
Use the Schedule C form to report your business profits and losses and find your taxable self-employment net income (or pass-through income). Those who are self-employed through farming should use a Schedule F and partners use a Schedule E. Once you have your net income you can calculate the due self-employment tax.
- If you’re filing a Schedule C then you might be eligible to claim the Earned Income Tax Credit (EITC). See if you’re eligible here.
- Independent contractors should receive 1099 forms from their clients with details on amounts paid throughout the year.
Calculating your self-employment tax
The Schedule SE form is used to calculate the self-employment tax you owe. If crunching numbers isn’t your thing, you might want to enlist the help of a tax pro (or taxation program) at this point.
Once you’ve completed the Schedule SE, the amount of self-employment tax calculated is then used for filling out your individual tax return and added to your personal tax liability for 2018. Personal tax returns for the 2018 tax year are due by 15 April, 2019.
What are quarterly estimated taxes?
If you expect to pay more than $1,000 in self-employment tax in 2018, you’ll need to be paying quarterly estimated taxes to the IRS. This will be based on your expected earnings for the year, using last year’s tax return as a guide. You can use the worksheet on Form 1040-ES to help you calculate your quarterly estimated tax.
If you’ve paid too much or too little estimated tax, you can adjust your next payment to reflect your earnings. Payments are due at the end of each quarter. Missing a payment, making a late payment, and paying incorrect amounts are all subject to a penalty. Be sure to make note of quarterly estimated tax deadlines at the beginning of each tax year.
The final quarterly estimated tax payment for 2018 is due on January 15th. If you plan on filing your full tax return before 31 January then you can just put this payment through with your return.
Note: Fluctuating income? You might be eligible for an annualised installment method, helping you avoid penalties for missing payments.
2018 self-employment tax process tl;dr
Here’s a recap to keep things simple: Calculate your net earnings using the Schedule C form. You’ll need to know your total business income and expenses for the year. Take your net earnings and fill out a Schedule SE form to calculate the self-employment tax due. Once you’ve done that, you can file your personal income tax return using the 1040 form. Done!
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While we’ve presented general information here, it’s important to note that we are not financial advisors, and we always suggest talking to a qualified tax accountant for more in-depth and situation-specific questions.