Self-employment affords you many freedoms that you could not enjoy while working for someone else. You have the ability to create your own work schedule, and you do not have to answer to an unreasonable employer who neither understands nor appreciates you.
However, the freedom of self-employment does not relieve you from your obligation to pay taxes. Instead, your tax obligation changes, and you have more responsibility than you did as an employee. Here is a guide to self-employment taxes and how to file them.
What are self-employment taxes?
Federal law requires most workers to pay taxes that go to Medicare and Social Security. When you work as someone else’s employee, your employer withholds a certain amount of your paycheck to fulfill this obligation on your behalf. However, as a self-employed person, you usually do not receive a regular paycheck, meaning that there is typically no withholding. Instead, you fulfill your obligation by paying self-employment taxes. These are separate from the income taxes you owe on a yearly basis.
How do you file self-employment taxes?
The Internal Revenue Service expects you to pay self-employment taxes on a quarterly basis. If you do not pay them until the end of the tax year when you file your income taxes, you usually have to pay a penalty.
The IRS provides special forms and worksheets to help you calculate self-employment taxes. You should also keep track of any paperwork related to your self-employment income. These include receipts for business-related expenses for which you plan to take deductions and forms related to income. Self-employed people often receive 1099 forms in lieu of the W2s that employees receive from their employers.
Not everyone who receives self-employment income has to pay self-employment taxes. The obligation applies if you are earning your living from self-employment. The IRS does not assess self-employment taxes if you make less than $400 a year working for yourself.