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Understanding self-employment taxes

Key takeaways

  • The “self-employment tax” means you’ll pay up to 15.3% for Social Security and Medicare taxes, since you're considered as both employer and employee. 
  • Being self-employed allows you tax deductions for qualified business income, retirement account contributions, and business-related expenses.
  • If you’re self-employed, you must pay quarterly tax estimates due on April 15, June 15, September 15, and January 15.
When you’re self-employed, one of the most important and complicated parts of your finances can be managing taxes. You may pay more than you think, particularly when you account for what’s known as the “self-employment tax”; and more often than you think, with estimated tax payments due 4 times a year.

What is the self-employment tax?

Self-employed people pay up to 15.3% in federal self-employment taxes—this is because you’ll need to pay your Social Security and Medicare taxes as both the employer and the employee. As a traditional employee, you might be used to seeing such taxes withheld from your paycheck, but those should have only added up to 7.65% of your wages. As both business owner and wage earner, you’ll need to double that.*

You’ll also have to pay your state taxes, but fortunately there’s no state self-employment taxes.

Tax deductions for self-employed

The good news is you are entitled to certain deductions when you’re self-employed, potentially reducing your taxes. For example, you can deduct the employer-equivalent portion of your self-employment tax when determining your adjusted gross income. Note this affects only your income tax, not your net earnings from self-employment or your self-employment tax.

Many freelancers may qualify for a deduction of up to 20% for qualified business income. In addition, contributions to certain retirement accounts may also be tax deductible. Keep in mind, the Internal Revenue Service (IRS) dictates the maximum amount you can contribute in a given year.

Other potential deductions if you’re self-employed or a business owner include business-related expenses, such as health and business insurance premiums, marketing, legal and professional fees, office supplies, auto and travel costs, and more.

For more information on tax deductions, visit IRS.gov.

How often must you pay self-employment pay taxes?

For estimated tax purposes, the IRS divides the year into 4 payment periods. Each has a specific payment due date. If you don’t pay enough tax by the due date of each payment period, you may be charged a penalty even if you’re due a refund when you file your income tax return at the end of the year.
When paying self-employment tax, quarters aren’t the ones you’re used to:   Q1 includes January, February, March: First payment due date is April 15.   Q2 includes April, May: Second payment due date is June 15.   Q3 includes June, July, August: Third payment due date is September 15.   Q4 includes September, October, November, December: Fourth payment due date is January 15   Note: Payment dates vary but are generally around the 15th of the month. For instance, the dates for 2022 were: April 18; June 15; Sept. 15; and Jan. 17, 2023. You don’t have to make the payment due January 17, 2023, if you file your 2022 tax return by January 31, 2023, and pay the entire balance due with your return.
Note: Payment dates vary but are generally around the 15th of the month. For instance, the dates for 2023 were: April 18; June 15; Sept. 15; and Jan. 16, 2024. You don’t have to make the payment due January 16, 2024, if you file your 2023 tax return by January 31, 2024, and pay the entire balance due with your return. If you are able to make the payment due January 16, 2024, then you have until April 15th, 2024, to file your 2023 tax return. Keep an eye on extensions due to federally declared disasters that may impact deadlines for your situation.

How to calculate self-employment taxes

When you’re employed by someone else, you usually have quarterly taxes paid automatically, since taxes are generally withheld from every paycheck. But when working for yourself, you’ll need to make sure you're paying the right amount of taxes each quarter.

In general, the minimum amount you'll need to pay each quarter to avoid penalties for underpayment is either: 

  • 1/4 of 90% of what you’ll owe for the current year, or 
  • 1/4 of 100% (110% for higher incomes) of what you owed for the prior year. This is called the safe harbor amount.

If you end up underpaying for any quarter, you may owe a penalty. To avoid mistakes or missing payments, you might want to consider working with a tax professional, who can help you determine how much to pay each quarter. You can then focus on your business.

IRS.gov offers additional resources on taxes for the self-employed, including its Tax Withholding Estimator tool that can help you figure out how much you should withhold for taxes.

How to manage your self-employment taxes easier

Personal vs. business Keeping personal and business expenses separate can help simplify the tax filing process, which may help you avoid mistakes and potential penalties. You’ll want to keep complete tax records and all supporting documents for 7 years, as the IRS can request them for up to 6.

Location If you earn money in multiple states, make sure you know the rules for those states. Most states have an earnings threshold. If you earn more than that amount working in the state, you’ll need to file a tax return.

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Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

*Source: IRS, “Self-Employment Tax (Social Security and Medicare Taxes),” https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes, November 2023

This information is general in nature and provided for educational purposes only.

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