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6 must-know tax tips for the self-employed

Key takeaways

  • It's important to know about self-employment taxes: You will need to pay both employer and employee components of Social Security and Medicare taxes.
  • Quarterly estimated taxes can be confusing at first. If you underpay or pay late, you may owe penalties so it can make sense to work with a tax professional if you have questions or concerns.
  • People who are self-employed may be able to take deductions that a person who is employed by a company won't have access to—for instance for a home office. That can help take a bite out of the overall tax bill.
  • Setting aside money in an account dedicated only to tax payments can help ensure that you always have enough ready to pay the tax bill.

Setting out on your own as a small-business owner takes guts, grit, and lots of organization. One of the most important and complicated aspects of managing your finances when you're the boss, besides keeping the lights on and vendors paid, can be managing taxes.

Here's what you should know if you're considering self-employment.

1. An extra tax is coming your way: The self-employment tax

The first thing to understand is the self-employment tax. Self-employed people pay up to 15.3% in self-employment taxes—12.4% in Social Security taxes up to certain income limits indexed for inflation ($160,200 in 2023) and 2.9% for Medicare with no income limit. Some high earners are subject to an additional 0.9% Medicare tax: The income thresholds are $200,000 for single filers and $250,000 for those who are married and filing jointly.

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2. Paying taxes is 4 times more fun with quarterly estimated taxes

It's a common misconception that the only time you need to pay taxes is when you file your tax return for the year.

"That's partly true," says Christopher Williams, principal at Ernst & Young in the Private Tax group. "But for the federal, and for most states, what they actually look at is that you have some minimum amount of tax paid in every quarter, throughout 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.

People who are employed by someone else usually have this done automatically, since taxes are generally withheld from every paycheck. But when it comes to taxes for the self-employed, it's important to make sure you're paying the right amount of tax each quarter.

Working with a tax professional can make sense for people who are self-employed. They can tell you how much to pay each quarter and you can focus on your business.

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

  • 1/4 of 90% of what you will 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.

90% of the current year's tax bill vs. 100%/110% of last year's tax bill

Figuring out the minimum taxes you need to pay for your small business

3. What if you underpay estimated self-employment taxes? There's a form for that

If you find that you have underpaid quarterly estimated taxes, Form 2210 may help you calculate the potential penalty you may owe.

Also, "You can report your income on a quarter-by-quarter basis and calculate what your tax owed would be each quarter," Williams says. "So if a lot of your income came at the end of the year, you may only have underpaid for that last quarter and may not have any penalties in the prior quarters."

4. Keep meticulous records—for 7 years

As a business owner, it's important to make sure you're capturing all of your business-related expenses—and keeping receipts.

"For most purposes, tax authorities can go back 3 years to look at your return. But there are some instances where they can go back as many as 6. So we recommend 7 years, just to have 1 extra year. After that you can usually shred the information," Williams says.

Keeping your tax returns and all of the supporting documents organized and accessible may seem cumbersome at first but it can pay off in case the IRS comes calling.

5. If you travel for work—keep track of state tax rules

If you work or otherwise have earnings in a state besides the one in which you live, you may need to file another state tax return. Most states have an earnings threshold. If you earn more than that amount working in the state, you need to file a tax return.

But different states have different rules so it makes sense to research the rules in each state you work in.

6. You may be able to take some deductions other people can't

It can sound like people who are self-employed get the short end of the stick when it comes to taxes but the silver lining can be getting deductions for a home office or other business expenses. For instance, if you have a home office, you may be able to get a deduction for the dedicated space devoted to your business on property taxes paid, utilities, phone bill or internet service.

"So it's not just for computer equipment and desks. It's also a portion of those indirect expenses of operating your house that get converted from a nondeductible personal expense to now a deductible business expense," Williams says.

According to the IRS, there are two basic requirements for your home to qualify as a deduction: 

  1. Regular and exclusive use 
  2. Principal place of your business 

See IRS Pub. 587 for more information, and consult a tax advisor regarding your situation.

If you're claiming a deduction for property taxes and utility bills and all the other expenses, hold on to those receipts in case there's a question about those deductions. 

Finally, keeping a separate account to pay quarterly estimated taxes may make sense to help ensure the money is always available and ready to send. Options to consider include a checking or savings account, or a cash management account offered by brokerage companies. Learn more about keeping separate accounts.

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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.

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