In the past decade, the self-employment industry has grown more rapidly than any other employment segment, and the American Bureau of Labor Statistics expects it to continue to do so between now and 2026. The rapid growth of the industry has created numerous self-employment income opportunities for individuals who wish to work for themselves and find the financial freedom they crave.
However, one of the downsides of self-employment income is the fact that individuals are in charge of not only organizing their net earnings but also of filing their own taxes.
The process is a bit different from a traditional job, in which you only receive a Form W-2 at the end of the year. When working for a company, your employer withholds Social Security Tax and Medicare Tax.
Because self-employed individuals do not have any employer to withhold income for tax purposes, they must pay the entirety when filing their self-employed income tax return. They can then deduct one-half of their self-employment taxes from their personal tax return.
When you’re self-employed, you will likely receive an Internal Revenue Service (IRS) Form 1099. If you work for multiple clients, it’s possible that you’ll receive multiple 1099s. The individual or business sending you a 1099 is not responsible for withholding taxes, meaning there are no taxes withheld on any 1099 income. You are also responsible for tracking any expenses to determine if you’re eligible for a tax deduction.
While accounting software can handle these tasks, knowing the process could be beneficial, especially because American tax law is so complicated. Below, you’ll find a complete guide detailing everything you need to know about self-employed earnings and self-employment tax (or SE tax).
IRS tax forms freelancers need to know
At the beginning of every year, companies and employers are required to send out tax forms to anyone they paid more than $600 to during the previous year. This typically includes most independent workers who performed contracted work.
There are numerous tax forms that you could receive. Here are the types of IRS forms you should look out for and what each one means for your tax situation. These forms are used for federal tax. You may need to look at your respective state’s information to learn more about state tax.
Tax form 1099-MISC
A 1099-MISC Form is an income tax form for self-employed workers. It summarizes any miscellaneous income you have from the calendar year, including income you receive while working as an independent contractor. The money you earn as an independent contractor is income that’s subject to taxation.
The most common type of IRS Form 1099 income is from independent contracting work. Companies typically give a contractor a 1099-MISC if they pay him or her more than $600 during the tax year.
However, many companies now say their contractors fall under the rules for a 1099-K, which is for contractors who accept credit card payments from customers via PayPal or other payment processors. You must make over $20,000 and receive over 200 payments to receive a 1099-K.
Another type of 1099 that you could receive is Form 1099-INT. The 1099-INT Form reports interest that you accumulated over the year. For instance, the interest income that you collect from things such as U.S. savings bonds and savings accounts are taxable. You are required to report the interest on your federal tax return.
You will receive a 1099-INT Form from each financial institution in which you accumulated taxable interest. The IRS.gov website provides an extensive breakdown of the reporting requirements.
Additionally, many freelancers make an effort to set up a retirement plan, participating in IRA contributions and life-insurance contracts. If your retirement account yields more than $10 in earnings for the year, you’ll receive a Form 1099-R.
The 1099-R Form is useful for things such as a traditional IRA, Roth IRA, life insurance policy, and pension. Form 1099-R could also come into play if you’ve engaged in a direct rollover of a profit-sharing plan. Direct rollovers would appear in the distribution codes under box 7.
Even if you don’t receive a paper form, you will still need to report income and pay taxes. You’re responsible for reporting gross income to the IRS, even if you don’t receive a form. You can report any undocumented self-employed net income on your Schedule C, which is a component of Form 1040.
If you did receive paper 1099s, you don’t need to submit them with your taxes. You should, however, keep them for your records. If you didn’t receive a Form 1099, you still need to report and keep proof of your income. Proof of bank deposits is one way to do so.
Keep in mind that, unlike employees, the self-employed don’t withhold any taxes from their monthly payment. So if you’re self-employed, you’ll need to save money on your own to pay your taxes. How much you’ll ultimately pay depends on a lot of factors, but you should calculate and pay estimated taxes every quarter if you want to avoid an audit and fines. We’ll touch on that more in the sections below.
A Schedule C is a tax form filed with your personal tax return in which you calculate the net income or loss of your business. You’ll tell government agencies how much you made (revenue), how much you spent (expenses), and if that resulted in a profit or loss.
A Schedule C-EZ is a simplified version of the form. You can use the C-EZ only if you meet specific requirements, such as that you only run one type of business and that you don’t have more than $5,000 in business expenses.
You must include a Schedule C or C-EZ with your Form 1040 during year-end taxes. You might also complete one when filing quarterly taxes using a 1040-ES (discussed below).
The first section of a Schedule C is where you report your earnings. You’ll notice some fields like “Returns” and “Cost of Goods Sold.” These are only applicable when you’re selling a physical product. These sections don’t apply to service or on-demand workers.
Tax form 1040-ES
As a traditional employee, your employer withholds your taxes from every paycheck and submits them to the Social Security Administration and other branches of the government on your behalf. As a self-employed professional, you receive gross income without any taxes withheld. This means you need to pay into Social Security yourself. The question is: How often?
Generally, most independent contractors have to submit taxes to the IRS every quarter. There are some specific regulations for this, but typically, you have to pay quarterly taxes if you expect to make more than $5,000 in self-employment income during the year.
If you do have to pay quarterly taxes, the due dates are:
- Quarter one (Jan. 1 – March 31): due April 15
- Quarter two (April 1 – May 31): due June 17
- Quarter three (June 1 – Aug. 31): due September 16
- Quarter four (Sept. 1 – Dec. 31): due January 15 of the following year
If you don’t pay quarterly taxes — or don’t pay enough — the IRS will likely penalize you anywhere from 6% to 8% of the amount that you underpaid. Imagine you owe $2,000 in taxes and did not make any quarterly payments. The IRS will charge you 6% of the $2,000, meaning you’ll owe a penalty of $120.
If you can’t pay your taxes, the government is rather accommodating, so long as you receive IRS approval. If you’re in trouble or need help, you should talk with a tax professional or CPA as soon as possible. Financial professionals can work with the IRS to construct a payment plan or extension.
A Form 1040-ES serves as a tax calculator that allows you to estimate how much you’ll make during the year and the amount of tax you can expect to pay on those earnings. Form 1040-ES will indicate your estimated tax payments for the quarter. You should complete a 1040-ES each quarter when you pay estimated taxes. As freelancers are likely aware, income can fluctuate greatly, which would alter your estimated gross income for the year.
There is also a “safe harbor rule”: If you expect to make more this year than you did last year, the government merely requires you to pay at least 100% of what you paid last year (110% if you make more than $150,000). You’ll still have to pay the full amount of what you owe at the end of the year.
Schedule SE will help you calculate how much you owe in self-employment tax liability. Curious about who must file Schedule SE? According to the IRS’ Instructions for Schedule SE, you must file this form if “the amount on line 4 of Short Schedule SE or line 4c or Long Schedule SE is $400 or more.”
Line 4 on the Short Schedule SE is the total of net farm profit, social security, retirement or disability benefits, and the net profit or loss from Schedule C multiplied by .9235. Furthermore, if you “had church employee income of $108.28 or more,” you must file Schedule SE.
The Social Security Administration uses Schedule SE to tax your self-employment net earnings. Individuals of all ages are required to submit Schedule SE if they meet either of the two prior criteria, regardless of whether they already receive social security or Medicare benefits.
The Social Security and Medicare tax rate for self-employment income is 15.3%. (This does not include your federal income tax). When you’re an employee, you pay 7.65% in Social Security and Medicare tax, and your employer pays the other 7.65%. When you’re self-employed, you pay the full 15.3%, in what is known as “self-employment tax.” Only the first $128,400 of self-employment income is eligible for taxation at the full 15.3% tax rate.
When you’re prepared to file your taxes, you’ll need to submit an IRS Form 1040. This is a simple tax form that first went into effect for the 2018 filing year. The form asks you for things such as your Social Security Number and information about any dependents you may have. If you have children, you could be eligible for a child tax credit.
The United States sought to create simple tax returns and did so with Form 1040. Most people are now eligible for a standard deduction, providing them with a tax deduction. You can also e-file online once you’ve completed your tax preparation. The IRS website offers more information about e-file options. If you choose not to accept the standard deduction, you’ll need to complete a Schedule A to determine your filing status for itemized deductions.
The United States used to use different 1040 forms depending on your status. For instance, Form 1040-EZ was once used for “Single and Joint Filers with No Dependents.” Your tax preparer would need to gather essential information before submitting your taxes.
Under the new tax code, those who used to file Form 1040-EZ likely won’t need to file a tax return. If you do have to file a tax return, most people can use the simplified Form 1040 to file their taxes.
If you realize that you made a mistake when filing your original return for the tax year, you may need to consider filing Form 1040X. Form 1040X allows you to file an amended return, making any corrections to the Form 1040 that you submitted previously.
As these Form 1040X instructions detail, the form also allows you to “change amounts previously adjusted by the IRS” and “make a claim for a carryback due to a loss or unused credit.” A carryback occurs when you’ve overpaid your taxes as the result of a Net Operating Loss.
You can file Form 1040X to provide the IRS with any additional information you may have forgotten when first filing. Amending your federal return ensures that you report the correct amount of income and expenses. Doing so could potentially net you an additional refund or require you to pay extra tax.
When submitting an amended U.S. Individual Income Tax Return, you may need to provide an explanation of changes, detailing why you omitted the information on your original tax return.
Preparing self-employed quarterly taxes
If you’ve been an employee before, you know your employer withholds taxes from your pay before you receive a paycheck. They then send those taxes to the IRS and Social Security Administration on your behalf each month.
As a contractor, taxes aren’t withheld from your pay. However, the government still wants to be paid throughout the year, so they require you to send in your own quarterly taxes with Form 1040-ES.
Most independent contractors have to pay quarterly taxes. The easiest way to tell is with the $1,000 test, which is based on the amount that you’ll owe in taxes at the end of the year:
- If you expect to owe more than $1,000, you’ll probably have to pay quarterly taxes. Earning more than $5,000 a year will typically put you in this category.
- If you expect to owe less than $1,000, you probably won’t have to pay quarterly taxes, but you will have to pay year-end taxes.
In both cases, you’ll calculate your final official tax payment when you do your year-end taxes. The quarterly tax payments are merely estimates. Nothing is official until you file taxes at the end of the year.
When making quarterly tax payments, there’s a good chance that you’ll either overpay or underpay for the tax year. What happens then?
- If you made excess contributions on your quarterly taxes, you’ll receive a tax refund at the end of the year.
- If you underpaid on quarterly taxes, you’ll pay the difference at the end of the year, plus penalties and interest.
You only owe taxes on your self-employment earnings, which is business income minus business expenses. Net profit is noticeably different than total income, which is the total you make before accounting for costs or taxes. Make sure you’re keeping track of your expenses. Doing so will allow you to take deductions, which could lead to the IRS returning a significant portion of your income tax return payments to you in the form of a refund.
Preparing self-employed year-end taxes
On an annual basis, you’ll calculate your final taxes for the prior year. If you owe less than you paid in quarterly tax payments, you’ll receive a tax refund. If you owe more than you paid in quarterly taxes, you’ll owe more money to the government. A self-employment tax calculator could help you determine your taxable income.
You’ll fill out a Schedule SE to calculate your self-employment taxes, plus Form 1040 to calculate your federal income tax. You may also need to calculate state income taxes or local income taxes. You can find information about how to do so on your state’s website.
Understanding the self-employment tax
As previously mentioned, part of everyone’s income goes towards supporting Social Security and Medicare. This is called the “FICA tax” if you’re an employee or “SECA tax” if self-employed. When you are an employee, you pay 7.65%, and your employer pays another 7.65% for you. When you’re self-employed, there is no one else to pay the Social Security portion. So you pay the full 15.3% yourself, hence why it’s nicknamed the “self-employment tax.”
For contractors, your self-employment tax is calculated on a Schedule SE (SE stands for self-employment). After you calculate your net profit on your Schedule C (your earnings minus expenses) and submit Tax Form 1040, you’ll then calculate how much of that is subject to self-employment tax.
The tax is used to fund the nation’s Social Security and Medicare programs, which help take care of you after you retire or if you become permanently disabled. As mentioned earlier, all wage earnings in the U.S. must contribute to these programs.
File your self-employment taxes accurately
Now that you understand that you must file taxes on your self-employment income as you earn it, as well as contribute an extra portion to Social Security and Medicare, you can better prepare for the tax-filing season. Using tax software throughout the year could help when filing season finally arrives.
Tax software will help ensure that you don’t have to pay additional fees or penalties for underpaying your taxes and that you can keep more of your hard-earned money. For more tax-time tips, see our articles on avoiding an audit and filing taxes when you have both 1099 and W-2 income.