How to file self-employment taxes: A step-by-step guide

1. Find out if you need to pay self-employment taxes

Individuals whose net earnings meet the IRS threshold of $400 and operate their own businesses or work independently as sole proprietors, independent contractors, or freelancers are generally required to pay self-employment taxes. 

2. Add up your self-employment income

To begin this process, gather all sources of self-employment income, which may include revenue from freelance work, consulting projects, or other contractor activities. For the most part, you’ll receive 1099 forms for income you’ll need to pay self-employment tax on.

The most common 1099 form you’ll receive as a freelancer or independent contractor is the 1099-NEC. Businesses send out 1099-NEC forms to contractors they pay more than $600.

Once you have all your income sources, you can calculate your gross self-employment income. Add up the total revenue from each source and Form 1099, including any payments or compensation for your services.

Learn the key IRS deadlines and dates to help with self-employment taxes

3. Maximize your self-employment deductions

After determining your gross income, you need to account for deductible business expenses. With self-employment taxes, you’ll want to take advantage of all available deductions to maximize your savings. 

Self-employment deductions are normal and regular business expenses that can lower your tax liability.

Here are some key self-employment deductions to consider:

• Home office: If you use a portion of your home exclusively for your business, you may be eligible for a home office deduction. This deduction allows you to deduct a portion of your home-related expenses, such as rent, utilities, and insurance.
• Insurance deductions: The premiums you pay for coverage like property and liability insurance tied to your business are deductible. 
• Travel expenses: Travel that’s primarily for business purposes like transportation and lodging can be tax deductions. 
• Marketing costs: Expenses for promoting your business, such as advertising and website development, are deductible expenses. 
• Legal fees: Attorney fees or business-related legal expenses for registering as a self-employed business owner. 

By taking advantage of these deductions, self-employed individuals can reduce their taxable income and lower their overall self-employment taxes.

4. Calculate your self-employment tax

Self-employment taxes cover Social Security and Medicare, collectively known as FICA taxes. When you’re self-employed, you pay the entire FICA tax rate of 15.3%.

FICA taxes are broken down into two parts:

• Social Security (12.4%): This tax contributes to the Social Security program, which provides retirement, disability, and survivor benefits to eligible individuals. In 2024, you only pay Social Security tax on the first $168,600 of your self-employment income.
• Medicare (2.9%): This tax supports the Medicare program, which offers health insurance coverage for individuals aged 65 and older and certain younger individuals with disabilities. 

Higher-income earners may be subject to an additional 0.9% tax if their self-employment net earnings exceed $200,000 for single filers and $250,000 for married couples filing jointly.

You only owe taxes on your self-employment earnings, which is business income minus business expenses. To calculate your self-employment tax, you need your net earnings and taxable income—you can use a self-employment tax calculator to help. 

5. Determine whether you need to pay estimated taxes

Most self-employed individuals need to pay quarterly estimated taxes, also known as estimated quarterly taxes. 

The easiest way to tell if you need to pay estimated taxes is with the $1,000 test—if you expect to owe more than $1,000, you’ll probably have to pay quarterly taxes. Earning more than $5,000 in self-employment earnings during the year will typically put you in this category.

If you have to pay self-employment taxes, you’ll have four quarterly payments to make. Quarterly estimated tax due dates are April 15, June 15, Sept 15, and Jan 15 of the following year. 

When filing and paying quarterly estimated self-employment taxes, you’ll use Form 1040-ES. This tax form will help you calculate how much tax you owe and need to pay to the IRS. 

When making quarterly tax payments, there’s a good chance you’ll overpay or underpay. If you overpay, you’ll receive a tax refund when you file your tax return for the year. And if you underpay, you’ll need to pay the difference.

6. Fill out your tax forms

When filling out an annual tax return, self-employed workers need to complete several tax forms and schedules to accurately report their income, calculate self-employment taxes, and claim deductions. 

Before you start, ensure you have all the essential information readily available. This includes your Social Security Number (or Individual Taxpayer Identification Number), all your income records (like 1099-NEC forms and invoices), and your expense records to support your deductions. If you're paying electronically, you'll also need your bank account information.

Next, fill out the required forms. 

The IRS has specific forms for reporting self-employment income and calculating your tax:

Form 1040

Individual taxpayers use this form to report their income and calculate their tax liability, whether they’re self-employed or not.

Schedule C

Schedule C is specifically for reporting profit or loss from your business (or businesses) if you're self-employed. You'll report your gross income and deduct your allowable business expenses to arrive at your net profit or loss. This net profit figure is then carried over to Form 1040 and Schedule SE.

Schedule SE

Schedule SE is where you'll calculate your self-employment tax, which covers your Social Security and Medicare contributions. You'll use the net earnings from your Schedule C to determine this amount. The calculated self-employment tax is then reported on your Form 1040.

7. File and pay your self-employed taxes

Once you've completed all the necessary forms, you'll need to file your return with the IRS and make your tax payment. There are a few ways to file:

• E-filing: This is generally the most convenient and secure method. You can use tax software or hire a tax professional to e-file your return.
• Paper filing: You can also download the forms from the IRS website and mail them in, though this method can be more time-consuming.

Similarly, you have several options for paying your taxes:

• Direct Pay: Pay directly from your bank account through the IRS website or by phone.
• Check or money order: If you're filing a paper return, you can include a check or money order made payable to the US Treasury.
• Debit/credit card or digital wallet: These options are available through third-party providers, but keep in mind that processing fees may apply.

The deadline for filing in 2025 will be April 15, though you can request an extension until October 15 if needed.

Along with regular income and self-employment tax, you may also be responsible for collecting sales tax. Your business will need to collect and pay sales tax if it sells certain products.

If you collect sales taxes, you’ll need to send them to the appropriate state or local tax agency. Register for a sales tax permit, keep track of your sales, and collect the appropriate tax from customers. 

Note that several states also require you to pay quarterly estimated self-employment taxes. Many have the same threshold as the IRS when determining whether to pay estimated taxes, while others have much lower limits. 

What happens if you don’t pay self-employment tax?

Meeting your tax obligations is crucial for maintaining a good standing with the IRS and avoiding potential legal and financial troubles. Failing to pay your self-employment tax can have serious consequences, so it's important to understand the risks involved. The IRS has various ways to address unpaid taxes. 

Some things that could happen if you don't pay your self-employment tax:

• Penalties: The IRS can impose penalties for late payment, late filing, and underpayment of taxes. These penalties can quickly accumulate and significantly increase your tax liability.
• Interest: Interest can accrue on any unpaid tax balance, further adding to your debt.
• Liens: The IRS can place a lien on your property, which can make it difficult to sell or refinance.
• Levies: The IRS can levy your bank accounts, wages, or other assets to collect unpaid taxes.
• Wage Garnishment: A portion of your wages can be withheld and sent directly to the IRS to satisfy your tax debt.
• Passport Revocation: In some cases, the IRS can revoke your passport if you have a significant tax debt.
• Criminal Charges: In severe cases of tax evasion or fraud, you could face criminal charges, which can result in fines and even imprisonment.

It's crucial to take your tax obligations seriously and make every effort to pay your self-employment tax on time and in full. If you're facing financial difficulties, reach out to the IRS or a tax professional to discuss payment options or potential solutions to avoid these serious consequences.

Find peace of mind come tax time 

Understanding and properly filing self-employment taxes is key for individuals who are their own bosses. Accurately filing these taxes ensures compliance with the law and helps avoid penalties. 

Using self-employed tax software like QuickBooks Solopreneur throughout the year could help when tax season finally arrives. Such software can also help you accurately track your expenses and income and manage cash flow.