What Are the Self-Employed Requirements?

A self-employed person is generally required to file an annual return and pay estimated tax quarterly. Anyone self-employed normally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording “self-employment tax” is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).

Determining Eligibility for Self-Employment Tax

You must first determine if you are subject to self-employment tax and income tax. That requires figuring your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040. But in some situations your loss is limited. You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions. If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to figure your estimated taxes for the next quarter.

IRS Requirements for Quarterly Payments

The Internal Revenue Service (IRS) requires you to make quarterly estimated tax payments if both of the following apply: (1) you expect to owe at least $1,000 in federal tax for the year, after subtracting federal tax withholding and credits, and (2) you expect federal withholding and credits to be less than the smaller of: 90 percent of the tax to be shown on your federal tax return, or 100 percent of the tax shown on your federal tax return from the year before (only applies if your return the year before covered 12 months – otherwise refer to 90 percent rule only)

How to Calculate Payments

To calculate your federal quarterly estimated tax payments, you must estimate your adjusted gross income, taxable income, taxes, deductions, and credits for the calendar year. Form 1040-ES includes an Estimated Tax Worksheet to help you calculate your federal estimated tax payments.

Rules to Determine Self-Employment

You are self-employed if (1) you carry on a trade or business as a sole proprietor or an independent contractor; (2) you are a member of a partnership that carries on a trade or business; or (3) you are otherwise in business for yourself (including a part-time business.

How to Make Quarterly Payments

Since you do not have employer withholding taxes for you as a self-employed individual, an estimated tax is the method used to pay Social Security and Medicare taxes as well as income tax. The form used to figure these taxes is Form 1040-ES for individuals. Form 1040-ES contains a worksheet that is similar to Form 1040. You will need your prior year’s annual tax return in order to fill out Form 1040-ES. Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax. Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System.