When you are self-employed, you pay self-employment taxes to the IRS each year, including estimated quarterly tax payments. For some, self-employment income varies every month and every year, making it tough to estimate what you owe the IRS.
We’ll review the basics of self-employment taxes and your options for tax relief when you can’t pay them.
What Is Self-Employment Tax and Who Pays Self-Employment Taxes?
Self-employed individuals pay both income and self-employment taxes. Self-employment tax is divided into Social Security and Medicare taxes. Medicare tax applies to wages, compensation, and self-employment income.
The following are individuals earning 1099 income who must pay self-employment taxes:
- Independent contractors and freelancers such as accountants, hair stylists, designers, writers, and artists.
- Sole proprietors such as local grocery stores, a small landscaping company, or tutoring services.
- Church employees who earned over $108.28 in the prior tax year.
How Do You Estimate Self-Employment Tax?
The following are the steps to estimate self-employment taxes:
- Determine the total earnings made during the year you are filing self-employment taxes. These earnings are typically found on each 1099 form you receive from clients who paid you over $600.
- To find your taxable income, multiply your total earnings by the amount of income subject to self-employment taxes. This is typically a rate of 92.35%. 92.35% is used because 7.65% of your income could be deducted towards half of the FICA tax.
- Multiply your taxable income by the standard self-employment tax rate of 15.3% (12.4% for Social Security and 2.9% for Medicare).
- This final number represents the estimated self-employment taxes you are required to pay in the current year.
How Do You Report and Pay Self-Employment Tax to the IRS?
Self-employment taxes are calculated on Schedule SE and reported in the “Other Taxes” section of Form 1040. As a self-employed individual, you must make quarterly estimated tax payments, specifically the payment for estimated federal income and self-employment taxes.
Use one of the following IRS-approved payment methods to pay your self-employment taxes:
- Electronic Funds Withdrawal: If you e-file, you can pay the IRS directly from your bank account.
- Direct Pay: Like EFW, this method allows you to pay taxes from a checking or savings account.
- Credit or Debit Cards: This option allows you to pay your taxes by debit or credit card online or by phone.
- Cash (In-Person): You can also make cash payments at a local IRS office or participating retailer.
Do You Have to Make Estimated Tax Payments When You are Self-Employed?
Yes. As a self-employed individual, you must make estimated tax payments each quarter. The general rule when calculating your self-employment taxes is to always overestimate, at least by a tiny amount. Otherwise, tax penalties are costly when you underestimate what you owe.
What Is the Self-Employment Tax Penalty for Late and Unpaid Taxes?
Generally, the IRS penalty for underestimating self-employment taxes averages 0.5% of the amount owed for each month. For each partial or full month that you don’t pay your self-employment tax in full, your tax penalties and interest keep increasing. The IRS caps the total self-employment tax penalty at 25%. However, interest will always be charged on underpaid self-employment taxes until they’re paid in full.
Does the IRS Offer Tax Relief for Self-Employed Tax Debt?
If you are a self-employed person with tax debt you can’t pay, you can apply for an IRS tax relief program. Self-employed tax relief allows eligible taxpayers with unpaid taxes to either reduce total taxes owed or make tax payments over a longer period. The following are some of the tax relief programs available for self-employed individuals:
- Offer in Compromise: Under certain qualifying circumstances, usually ongoing financial hardship, the IRS may allow a self-employed individual to settle tax debt for less than the current amount owed.
- Installment Agreement: Installment agreements allow those who are self-employed to set up affordable monthly payments instead of paying a single lump sum.
- Currently Not Collectible Status: In severe hardship cases, the IRS may temporarily pause a self-employed individual’s tax debt collection if they are convinced paying it would cause additional economic hardship. Keep in mind that CNC postpones tax payments but doesn’t cancel tax debts.
When you are paid as a self-employed person, remember the person or business that pays you reports payments to the IRS. It is essential to file your self-employment tax returns accurately and pay your taxes on time to avoid late penalties and interest.
Tax season can be overwhelming, especially when you are self-employed and paying your own taxes. If you need help calculating your self-employment taxes or help finding tax relief to pay back taxes you owe, you can schedule a free call by going to: https://www.wiztax.com/schedule or start online by answering 6 simple questions. We never charge for ‘investigations’ or consultations.
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