How To Claim Self-Employed Taxes

Running a business also comes with the responsibility of paying self-employed taxes. Here, we’ll explain how as a self-employed individual you can calculate your tax liability, lower your tax burden, and file your income tax return on time. 

Claiming self-employment on taxes

The simplest business structures in the United States are sole proprietorships or independent contractors (such as 1099 employees). Complex types of businesses include partnerships, corporations, S corporations, and Limited liability companies (LLCs). However, in this article, we will be focusing on sole proprietors and independent contractors. 

Once you choose a business structure, you will register your business accordingly. This will determine which types of income tax returns you will need to file.

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How much tax self-employed are required to pay

Self-employed people need to pay:

• Self-employed income tax which is the tax that everyone pays and is calculated based on how much income your business generates. Most businesses will be required to pay estimated taxes on a quarterly basis. 
• Self-employment taxes (15.3%) which is divided into two parts: 
  • Social Security Tax (12.4%), which in 2024, is capped at $168,600 in earnings.
  • Medicare Tax (2.9%) is the portion you pay based on your earnings, and there’s no cap. 

You will be required to pay self-employment taxes once your net earnings exceed $400 or you were an employee of a church and earned $108.28 or more.  

To report your Social Security and Medicare taxes, you need to file Schedule SE (Form 1040 or 1040-SR ), Self-Employment Tax as part of your annual tax return.

Estimating quarterly income taxes

Unlike being an employee whose taxes are withheld from their employer, as a self-employed worker, you’re responsible for prepaying estimated income tax. As such, the government wants you (a sole proprietor or independent contractor) to make quarterly payments of your estimated taxes.

Who pays estimated taxes

Generally speaking, if you expect to owe $1,000 or more in taxes when you file your tax return, you’re required to pay estimated taxes.

To see if you qualify and to calculate your estimated taxes, fill out Form 1040-ES, Estimated Tax for Individuals. To determine your estimated tax, you need to figure out your expected adjusted gross income, taxable income, taxes, business expenses, and credits for the year.

The 2024 tax rates schedules are located on page 7. It’s divided into four categories:

• Schedule X for singles
• Schedule Y-1 for married filing jointly or Qualifying surviving spouse
• Schedule Y-2 for married filing separately
• Schedule Z for head of household

Each schedule will tell you how much taxes you’ll pay based on your tax bracket.

Filing and paying estimated taxes

If you owe taxes, you’ll be required to file your by the following due dates for the 2024 tax year:

• Payment 1: April 15, 2024
• Payment 2: June 17, 2024
• Payment 3: September 16, 2024
• Payment 4: January 15, 2025

You have the option to pay online, by phone or by mail. Be sure to submit your forms and payments on time. Otherwise, you may be subject to underpayment and possibly overpayment penalties.

How to deduct business expenses

Since self-employed workers have more tax burdens than employees, knowing how to write off business expenses is important. This will help lower your tax burden through eligible tax write-offs. You can find out how much tax deductions self-employed individuals can claim in our article here. 

For sole proprietors and independent contractors, business expenses can be claimed on Schedule C (Form 1040), “Profit or Loss from Business.”

An important tax tip: Don’t forget that you’re eligible to deduct 50% of your self-employment tax as an income tax deduction on Form 1040. This is available to you regardless of whether you itemize deductions.

How to calculate your income tax

Here’s an example of how income tax is calculated:

• You’re a personal trainer who operates as a sole proprietor. 
• In 2023, you earned a revenue of $50,000.
• You deducted $15,500 in business expenses.
• Your net profit was $34,500, as reported on Schedule C ($50,000 - $15,500). 
• Your net earnings subject to self-employment tax, calculated on Line 4a of Schedule SE, came to $31,860.75 ($34,500 x 0.9235).
• Therefore, your self-employment tax was $4,874.69 ($31,860.75 x 0.153). You would report that amount on Form 1040 in the “Other Taxes” section.
• Also, you would report half of your self-employment tax, $2,437.35 ($4,874.69 x 0.50), on line 15 of Schedule 1 (Form 1040). This would reduce your adjusted gross income and the amount of taxes payable.

How to file your tax return

Here are the tax forms you’ll need to complete and important deadlines to keep in mind when filing your tax return. 

Sole proprietors

You will report your business income and expenses on your personal income tax return by attaching Schedule C, Profit or Loss from Business (Sole Proprietorship), to your Form 1040 or 1040-SR (for seniors ages 65 or older). 

This means you can report both personal and business tax liabilities on a single tax return. For example, if you have a full-time job and you have a side gig as a freelancer, you can report your income together on your personal tax return.

Independent contractors

Typically, independent contractors will receive a 1099-MISC tax form from each customer at year-end. You will need to report your income on Schedule C of your 1040 form. 

Then, you’ll add the business profit from Schedule C to Schedule SE, Self Employment Taxes form. This schedule will calculate your total Federal Income Contribution Act (FICA) taxes (which encompasses the Social Security and Medicare taxes).

You may also be required to submit the 1099-NEC form for some business expenses you've had. The IRS website provides more requirements.

Tax deadlines

Both types of self-employed workers typically need to file their taxes around mid-April each year. The filing deadline changes annually, so be sure to check the IRS website.

When you’re ready to file your tax return and pay any taxes due, you can file your tax return online.