Paying self-employment tax for the first time

It can be easily for freelancers and freelance people to forget about taxes because no employer is mechanically deducting tax from your paycheck. But if you want to avoid IRS penalties, you ’ ll want to get comfortable calculate and estimating self-employment taxes. column note : Credit Karma receives compensation from third-party advertisers, but that doesn ’ thymine affect our editors ’ opinions. Our third-party advertisers don ’ thyroxine review, approve or endorse our editorial content. It ’ s accurate to the best of our cognition when posted .Advertiser Disclosure

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This article was fact-checked by our editors and CPA Janet Murphy, senior product specialist with Credit Karma Tax® .

If you’re new to self-employment, estimating and paying self-employment taxes might seem scary.

But you need to face your fear and get a handle on self-employment taxes if you want to avoid IRS penalties .
If you recently made the leap from employee to freelancer, independent contractor or business owner, dealing with taxes — particularly self-employment tax — may feel overwhelming. As an employee, your employer withhold and paid federal and department of state income tax and payroll taxes on your behalf. As a freelance person, you ’ re on your own .
If this is your beginning time paying self-employment taxes, this guide will help you figure out how to estimate what you ’ ll owe and pay it on time .
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What is self-employment tax?

If you ’ ve ever prepared a federal income tax return, you ’ re probably at least slightly familiar with income taxes. But self-employment taxes are something else wholly .
If you remember back to the paystubs you received from your employer, you may have noticed the employer withheld several different amounts from your arrant pay, including Social Security and Medicare taxes. Virtually everyone who works must pay those taxes. Self-employment tax is the equivalent of the Social Security and Medicare taxes, but for people who work for themselves .
The IRS considers you to be freelance if you are a freelance, an freelancer contractile organ or in business for yourself, either entirely or as separate of a partnership. If you had self-employment income earnings of $ 400 or more during the class, you are required to pay self-employment taxes and file Schedule SE with your form 1040 .

How much are self-employment taxes?

Self-employment taxes consist of two separate rates : 12.4 % for Social Security and 2.9 % for Medicare, for a compound pace of 15.3 % .
txupdateselfemploytax image : txupdateselfemploytax
When you ’ re an employee, your employer withholds half ( 6.2 % Social Security and 1.45 % Medicare ) from your paycheck and matches those amounts for a total of 15.3 %. When you are freelance, you are responsible for the unharmed 15.3 % .
however, you can deduct half of your self-employment tax as an allowance to gross income — that ’ s the come your employer would pay if you worked for person else as an employee. On the your class 1040, you ’ ll claim this deduction on Line 27 of Schedule 1 .
But calculating your estimated self-employment tax international relations and security network ’ triiodothyronine adenine childlike as multiplying your self-employment earnings by 15.3 %. Two factors make the calculation a fiddling more complex : The Social Security wage base and the extra Medicare tax for high-income earners .
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Social Security wage base

Social Security taxes are only charged on a dowry of your income. This is called the Social Security engage base. For 2018, the Social Security tax applies to the first $ 128,400 of your combine income from wages and self-employment .
For example, say you have a full-time job earning $ 75,000 per year and drive for Uber on the weekends, making an extra $ 20,000 for the year. Your employer withholds 6.2 % Social Security tax on your wages and matches another 6.2 %. Your combine earnings from your job and your side gig are less than the Social Security wage base of $ 128,400, so you ’ ll pay another 12.4 % on your ride-share drive income of $ 20,000 .
however, if your earnings from your full-time job were $ 130,000, then you would have the utmost Social Security tax withhold from your wages. In that case, any self-employment income earned with your side gig would not be subject to the Social Security fortune of self-employment taxes .
There is no wage basis for Medicare, so no matter how much you earn, all wages and self-employment income are topic to Medicare tax .

Additional Medicare tax

In addition to the 2.9 % Medicare tax mentioned above, high-income earners are responsible for paying an Additional Medicare Tax of 0.9 % on income above the be thresholds :

When do I have to pay self-employment tax?

Your union income tax reappearance for any class is broadly due on April 15 of the follow tax year. however, because you ’ re freelance, you may need to make quarterly estimated tax payments to cover both your income tax and your self-employment tax obligations .
If you must make estimate quarterly payments, they ’ re due on April 15, June 15, Sept. 15 and Jan. 15 of the follow year. Those due dates shift to the follow clientele day if the 15th falls on a weekend or vacation. And extra rules may apply if you ’ re not a fiscal year taxpayer whose tax year doesn ’ thymine begin on January 1, or if you ’ re a farmer or fisherman .
If this is your first prison term dealing with self-employment taxes, knowing how much you should pay can be confusing .
The IRS provides a worksheet on Page 7 of Form 1040-ES to help you calculate your estimated self-employment tax, deoxyadenosine monophosphate well as your subtraction for half of your self-employment taxes. You can use this worksheet and the worksheet on Page 8 of Form 1040-ES to calculate both your estimated self-employment tax and estimated income tax for the year. Divide them by four, then pay them in four peer installments by the due dates mentioned above, using the vouchers included in Form 1040-ES .

What happens if I don’t pay self-employment tax on time?

If you estimate that you ’ ll owe at least $ 1,000 in tax for the class and preceptor ’ t pay your self-employment tax on time ( or at all ), you could end up owing a penalty for underpayment of estimated tax or if you pay your calculate taxes former. This is true even if you are due a refund when you file your come back .
The IRS calculates your underpayment punishment by figuring out how much you should have paid for each of the four quarterly installments, then multiplying the difference between what you paid and what you should have paid by the effective sake rate for the period. The effective concern rate is set quarterly. For the third base draw of 2018, the effective interest rate for underpayments is 5 % .
The penalty is calculated individually for each installment due date, so you can be charged a punishment for one one-fourth but not the others .

Bottom line

If this is your beginning foray into self-employment, you may have no estimate how much you ’ ll gain, so trying to figure out how much self-employment tax you ’ ll end up owing will be street fighter. You may want to consult a tax professional who can help you make an educate estimate .
If you end up making more than you thought, you can increase your estimate payments later in the year to reduce your potential penalties. If you end up making less, you can reduce your quarterly estimates late in the year, or apply the overpayment to future year ’ randomness estimated payments, thereby lowering the come you ’ ll need to pay adjacent year .
Without an employer to calculate and withhold taxes on your behalf, you ’ ll have to do the calculations on your own. But paying self-employment taxes is an significant part of being your own bos .
Relevant sources: IRS: Independent Contractor (Self-Employed) or Employee? | IRS: Self-Employed Individuals Tax Center | IRS: When to Pay Estimated Tax

A senior intersection specialist with Credit Karma Tax®, Janet Murphy is a certified public accountant with more than a ten in the tax diligence. She ’ randomness worked as a tax analyst, tax product development coach and tax accountant. She has account degrees and certifications from Clemson University and the U.S. Career Institute. You can find her on LinkedIn .
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About the author: Janet Berry-Johnson is a freelance writer with a background in accounting and insurance. She has a bachelor’s degree in accounting from Morrison University. Her writing has appeared in Capitalist Review, Chase News &a… Janet Berry-Johnson is a mercenary writer with a setting in report and indemnity. She has a bachelor ’ s degree in account from Morrison University. Her writing has appeared in Capitalist Review, Chase News & a… Read more.

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