Being your own boss has many upsides, but it also means extra work come tax season. One challenge is figuring out whether you owe self-employment taxes.
Business owners should know when self-employment tax applies and how to file self-employment taxes. Here’s what to know and how to do it.
What Are Self-Employment Taxes?
Self-employment taxes are how people who work for themselves pay into Medicare and Social Security. When you work for someone else, Medicare and Social Security taxes come directly out of your paycheck. Your employer also covers half of the tax load.
When you own your own business, you’re employer and employee — and you need to figure out both tax shares. The current self-employment tax rate is 15.3%, according to the IRS.
Who Owes Self-Employment Taxes?
Not every self-employed business owner needs to pay self-employment taxes. It all depends on how you structured the company. If your business is a sole proprietorship or a partnership, you owe self-employment tax on your income. You also owe self-employment tax if you collect a salary from an S corporation, but not on the profit distributions, according to TurboTax.
If your business is structured as an LLC and operates as a sole proprietorship, partnership or S corporation, you owe self-employment taxes. If your business is a C corporation or an LLC operating as a C corporation, you don’t pay self-employment taxes on your salary or for collecting company profits.
How to File Self-Employment Taxes
If you need to file self-employment taxes, here’s how you do it.
1. Calculate your total income and profit from the business.
If your business is a sole proprietorship, use the tax form Schedule C to calculate your business profit after expenses, such as paying for new equipment. If your business operates as a partnership or S corporation, you’ll receive a K-1 form showing your share of the profits.
2. Complete the self-employment calculation.
Once you know your business earnings, you can fill out the self-employment taxes form, Schedule SE (Form 1040). Go through the steps in this calculation to determine how much self-employment tax you owe. You’ll receive a deduction against your other income taxes by paying self-employment taxes, and you’ll calculate that deduction using this form.
3. Pay the self-employment taxes on your annual return.
Enter how much you owe in self-employment taxes on your personal income tax return (Form 1040). When you finish your return, you’ll know exactly how much you owe for the year, including for self-employment. Pay these taxes by the filing deadline (which is April 15, unless you file for an extension).
4. Pay self-employment taxes quarterly going forward.
In your first year of doing business, you can pay your self-employment taxes as a lump sum on your tax return. After that, you’ll need to pay your estimated income tax and self-employment taxes quarterly. To avoid interest and penalties, your estimated payments should equal the tax you paid the year before or make up at least 90% of what you’ll owe for the current year.
5. Consider changes to your business income.
When your business income increases, you usually owe more self-employment taxes. You might want to rerun the numbers using your estimated income and the tax form worksheet to see how much more you could owe. That way, you can start setting funds aside.
If you don’t want to run the calculations yourself, you could use small business tax software or hire an accountant. They can help you determine how to pay your small business taxes and your self-employment taxes. Whichever way you go, make sure you have a plan.