Generally, someone who classifies themselves as being self-employed is required to file an annual return and pay estimated tax on a quarterly basis. They also must pay self-employment tax (SE tax) as well as the income tax.

You may be asking yourself what self-employment tax is. The SE tax is a Social Security and Medicare tax that is primarily for individuals who work for themselves. It’s similar to the Social Security and Medicare taxes that are withheld from the pay of most wage earners working for an organization or cooperation outside of themselves. In general, anytime the term, “self-employment tax” is used, it refers to Social Security and Medicare taxes and not other taxes (such as the income tax).

How to Determine if You are Eligible for Self-Employment Tax

You must first determine whether or not you are subject to self-employment tax and income tax. That requires figuring out your net profit and net loss from your business. This is done by subtracting your business expenses from your business income. If your expenses are less than your income, then the difference is net profits and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference then becomes a net loss. You can usually deduct your loss from gross income on page 1 of Form 1040. However, in some cases your ability to deduct losses is limited.

You have to file an income tax return if your net earnings from self-employment were $400 or more. If the earnings from self-employment were less than $400, you have 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 estimate 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, you will also need to complete another Form 1040-ES 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.

(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 on your federal tax return from the year before (this only applies if your return the year before covered 12 months -otherwise it refers to the 90 percent rule only).

How to Calculate Payments

In order 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 Whether or not You Are Self-Employed

You are self-employed if the following apply:

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

How to Make Quarterly Payments

Since as a self-employed individual you do not have an employer withholding taxes for you, 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 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.

For more information on tax preparation, bookkeeping or any other questions you may have, contact our offices in Joplin, MO. Our team of certified public accountants will look over your information and help make sure you’re on the right track.