For Self-Employers: Beginner’s Guide To The Self Employment Tax Form

For small business owners, contractors, and freelancers, the freedom of being your own boss can bring many benefits, from setting your own work schedule to keeping all the profits your business generates. However, there are some drawbacks, and one of these is the requirement to pay self-employment tax.

Read on to find out how self-employment tax works, who has to pay it, how to calculate it, how to file it, and how much you can save.

Let’s get to it!

What is self-employment tax?

People with regular jobs pay payroll taxes for Social Security and Medicare that are typically split with their employers. The employee pays 7.65%, and the employer pays 7.65%, with a total of 15.3% being paid in taxes. 

Self-employment tax is a federal tax that you pay on your net earnings, also consisting of Social Security and Medicare. As with payroll taxes, the current rate is 15.3% and is split with 12.4% going towards Social Security and 2.9% for Medicare. It’s basically the same tax as people with regular jobs, the difference being self-employed people pay both halves.

Who pays self-employment tax?

You are generally considered self-employed if you own your own business, or with others as a partner in a partnership, or are an independent contractor or freelancer. In these cases, your income is subject to self-employment tax.

Even working for yourself part-time with a “side-hustle,” those earnings may also be subject to self-employment tax. The IRS states that any of the above making more than $400 must pay the tax.

What does Social Security Wage Base mean?

The Social Security Wage Base is the maximum gross earnings subject to Social Security tax that can be imposed by the IRS.

For 2022, the Social Security wage base is $147,000. This means Social Security tax only applies to the first $147,000 of your earned income from self-employment. After $147,000, you aren’t charged any additional Social Security tax. However, there is no limit on the Medicare portion of the self-employment tax. So no matter how much you earn, the Medicare tax applies to all your wages and self-employment income.

So, if you make $175,000 from your business or self-employed activities, you’d only pay Social Security tax on the first $147,000. The remaining $28,000 is not subject to Social Security tax, though, as mentioned above, it would be included and taxed for Medicare.  

Step-by-step guide on how to calculate self-employment tax

Calculating your self-employment tax is pretty straightforward! Just follow the steps below.

Step 1: Calculate your net earnings

Start by calculating your net earnings for the year. For the self-employed, this is usually found by subtracting total expenses from gross income or sales.

(Net Earnings = Gross Business Income – Total Business Expenses)

Step 2: Determine how much of your net earnings are taxable

Generally, only 92.35% of your self-employment earnings are subject to the 15.3% tax rate. This is because the 7.65% deduction includes the employer’s half of your The Federal Insurance Contributions Act (FICA) taxes, which would be deducted if you were paid as an employee.

Remember this step before applying the tax rate.

Step 3. Apply the tax rate to net earnings

Now, multiply your net earnings by the tax rate of 15.3%.

(Self-employment tax = Net Earnings x 15.3%)

That’s it! A fairly simple calculation. 

Keep in mind that it’s only the first $147,000 of earnings subject to the Social Security portion of the self-employment tax!

What tax forms do you use to file self-employment tax? 

If you’re going to file your taxes on your own, you’d better get familiar with the following tax forms right away:

Form 1040 

Almost everyone has to file this tax form, including you—a self-employed worker. 

Form 1040 is a federal income tax return that individuals file in the United States. The form determines how much the government owes or refunds based on the taxpayer’s total taxable income.

This form is quite straightforward to file. It requires simple and basic information like your Social Security Number, how many dependents you have, etc. 

Click here to see official instructions to file form 1040 from the IRS

Form 1040X

If you find any mistakes or you left out information on your original return (the 1040 tax form), you then will need to use Form 1040X: Amended Tax Return to file a corrected version of your federal return.

Click here to see official instructions to file form 1040X from the IRS

Schedule C

Anyone who operates a business as a sole proprietor must fill out Schedule C

A Schedule C helps you calculate your business’s net income or loss. It reports  

How much you made and spent throughout the year, and whether you made a profit or loss.

You can also file a Schedule C-EZ instead, which is a simplified version of the form only for those who meet certain requirements, such as running only one type of business and having no more than $5,000 in business expenses. 

You must include a Schedule C or C-EZ with your Form 1040 during year-end taxes.

Click here to see official instructions to file Schedule C from the IRS

On a side note, as you can see from the image above, you need to report your income in the first section, in which you will see some fields like “Returns” and “Cost of Goods Sold.” Normally, these are only applicable when you’re selling a physical product. But, for example, if you sell online advertising, the cost of purchasing digital ad space may be included in the “Cost of Goods Sold.’ So make sure to check your form carefully before submitting it.

Schedule SE

Generally, after you finish filing Schedule C and figure out your total profit or loss, you will move to Schedule SE. Schedule SE is a tax form that helps you determine how much tax you owe to the government. 

Click here to see official instructions to file Schedule SE from the IRS

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3 easy steps to get your self-employment tax forms organized 

Below is a 3-step quick guide to get self-employed workers through the tax season without issues. Check it out!

Step 1. Be aware of your income sources

To know exactly how much tax you need to pay or get refunded as a self-employed, you have to have good records of your earnings: how much and where they are from.

It’s fairly easy to understand why it’s important to be aware of how much you’ve made, but why income sources? 

This is because you will likely receive different tax forms from your client. For instance, if you make more than $600 from a single client or work platform like Upwork or Fiverr, they will probably send you a 1099-NEC by January 31, and if you receive your income through a third-party payment processor like PayPal or Stripe, you might also receive a 1099-K.

Once you’re clear about how much and where your incomes are from, you can understand what documents you’re expected to receive and avoid unnecessary incidents. 

Step 2. Check your deductions 

The good news if you pay self-employment taxes is you are actually entitled to a tax deduction for your federal income tax filing. You can deduct 50% of your self-employment tax bill (the employer portion) from your adjusted gross income, decreasing the amount of taxes you owe.

Let’s say you calculate your self-employment taxes to be $2,000, and you get a tax deduction of 50%, or $1,000, of your taxable income.

It doesn’t stop there—you can apply for more deductions! There are many business expenses that you claim for deductions, including these common ones:   

  •  Internet and phone bills
  •  Office supplies
  •  Computer and software
  •  Continuing education
  •  Auto expenses
  •  Marketing and advertising

Make sure to go over your expenses, claim all possible deductions and not waste a single penny on taxes! 

Also, if you have a difficult time keeping track of your expenses, try Shoeboxed. Shoeboxed is a receipt scanner software that can digitize every receipt of yours and keep them organized safely in the cloud. Stay ahead of your self-employment taxes with Shoeboxed today! 

Step 3. Know when your deadlines are

Federal income tax returns are generally due on April 15 of the following tax year. However, if you’re self-employed, 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 estimated quarterly payments, they’re due on April 15, June 15, September 15, and January 15 of the following year. 

Remember these due dates may move to the following business day if the 15th falls on a weekend or holiday.

You might also be interested in: How to File for Tax Return Delays if You Can’t Meet the IRS Deadline

Final thoughts 

Being self-employed gives you the freedom to do things your way. However, you must follow the IRS way when it comes to taxes. That’s why it’s extremely vital for you to fully understand what you’re expected to do and how to pay your self-employment taxes correctly, avoiding paying any penalties from the IRS. 

We hope the article has helped you with that! Check out our other blog posts for more financial knowledge! 

What’s Shoeboxed? 

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

How You Can Benefit From Mileage Tax Deductions

There are many deductible tax write-offs that a self-employed individual can take advantage of to lower their taxes. One of them is mileage tax deductions for your driving expenses. 

In this article, we’ll help you better understand how mileage tax deductions work and how much money you can save from claiming them. 

Related: Your Ultimate Guide to Travel Expenses

What is a mileage tax deduction? 

The mileage tax deduction is what you can claim on your tax return if you use a vehicle for business purposes and meet specific criteria. 

Mileage can be written off in whole or in part. You can deduct 100% of your mileage on your tax return if you have a dedicated car that you solely use for work. If you have a personal vehicle that you occasionally use for business, you can only deduct the miles you drive while working. However, it’s important to remember that the miles driven between your home and workplace don’t count as business mileage.

Who is eligible for mileage tax deduction?

Employees used to be able to claim a tax deduction for mileage and other expenditures not reimbursed by their employers. However, the Tax Cut and Jobs Act (TCJA) of 2017 repealed the deduction for employee business costs and changed the mileage deduction regulations, making it impossible for most employees to deduct mileage and other unreimbursed expenses.

So who is eligible for mileage tax deductions now? Here is your answer:

  • Small business owners. 
  • Self-employed taxpayers who file Schedule C or Schedule F.
  • Other self-employed workers including independent contractors, e.g., drivers for rideshare services.
  • Qualified performing artists, reservists in the armed forces, and fee-based government officials.
  • Individuals traveling for volunteer work or medical appointments.

How to deduct a mileage deduction

Depending on your circumstances, you can deduct mileage from your taxes in different ways. 

For example, you can’t claim mileage as a medical or charitable expense the same way as a business expense. You will need to use different forms, and the amounts you can deduct per mile will vary.

To claim a mileage deduction, you can opt for one of the following methods: 

1. The standard mileage rate

To know how much you can deduct with this method, simply multiply your business miles by the IRS’s mileage rate. 

The standard mileage rate writes off a certain amount for every mile you drive for business purposes. For the 2022 tax year, you can deduct $0.585 per mile driven (up from $0.56 in 2021).

2. The actual expense method

Rather than getting a fixed fee for the miles traveled, this method allows you to deduct the expenses of using a vehicle for business purposes. They may include:

  • Gas
  • Oil
  • Repairs
  • Insurance
  • License fees
  • Registration fees
  • Vehicle depreciation

The actual expense method may necessitate more documentation, but it can result in a bigger deduction than the standard mileage rate.

You should calculate your mileage tax deductions with both methods to find out the one that benefits you the most.  

How Shoeboxed can help you stay on top of your mileage tax deductions

Keeping receipts organized and safe is vital during the tax season as they are your concrete evidence for any tax deductions you claim. 

If you’re tired of spending hours and hours collecting and categorizing receipts by yourself, we’re here to tell you there’s a super easy alternative. It’s Shoeboxed

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About Shoeboxed

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes. More importantly, Shoeboxed helps you track mileage using your phone’s built-in GPS for unmatched ease and accuracy.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

Your Complete Guide to the IRS Tax Deduction Calculator

Tax deductions can save you a lot of money if you understand what they are, how they work, and how to take advantage of them. Have you ever wondered how much your qualified deductions total? What is the best IRS tax deduction calculator for a freelancer? 

This article will help you figure out the most common tax deductions for individuals and businesses and how to calculate them. 

What is a tax deduction? 

A tax deduction reduces the amount of income that is subject to taxation, lowering your taxable income. Alternatively, you can claim a tax deduction from your tax liability to cut the level of tax you owe.

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Mortgage interest, charitable contributions, medical expenses, and home office deductions are all qualifying categorized deductions.

Let’s read on to find the IRS tax deduction calculator for the most common tax deductions. 

The IRS tax deduction calculator 

Personal tax deduction

  • Mortgage interest

The mortgage interest deduction is available for mortgage interest paid on the first $1 million of mortgage debt. For homes bought after December 15, 2017, owners can claim only upwards of $750,000 in purchasing debt for their first and second properties. This 25% decrease in deductibility is predicted to continue from 2018 to 2025.

You must be legally obligated to pay the debt and make the payments reported to the IRS by your lender to claim this deduction.

  • Charitable donations

You can claim any money or nontaxable donations you provide to a qualifying philanthropic group if you qualify. To be eligible for this deduction, you must have evidence of any financial assistance, even if it is less than $250

You must get a certificate or acknowledgment from the nonprofit organization for any nontaxable (property) contributions and monetary donations over $250. Depreciation and amortization (property) contributions of more than $500 must be reported on Form 8283, Noncash Charitable Contributions, and your tax return.

For 2021, single taxpayers can deduct up to $300 in cash charitable donations, while married couples filing together can deduct up to $600. You can get the tax break even if you only take the standard deduction and don’t itemize.

  • Qualified business income

If you qualify for this deduction, you can subtract any dentistry expenses that reach 7.5 percent of your gross pay. For example, if your AGI (Adjusted Gross Income) is $100,000, you can claim medical expenses exclusively to the extent that they surpass $7,500. In this case, if your medical expenses are $10,000, you can deduct $2,500. 

Acceptable healthcare expenses also include health insurance and expenditures for you and your children that are not covered by health insurance.

If you have a qualifying Health Savings Account (HSA), you can offset your donations to the fund and don’t have to pay taxes on the income you earn.

Small business tax deduction

  • Qualified business income

The 2018 tax policy bill completely changed the way expenditures benefit most taxpayers, especially small-business owners. Most small businesses (single proprietorships, LLCs, S corporations, and partnerships) will be allowed to withdraw 20% of their revenue on their tax under the new tax code. Woo-hoo!

If you operate a small firm that makes $100,000 in revenue in 2019, you can offset $20,000 until regular income tax rates apply.

However, some restrictions may prohibit you from receiving this benefit. The most significant impediment is the income cap used for some high-earning business owners, such as lawyers, doctors, and consultants. 

This deduction begins to phase out if your income surpasses $157,500 for single filers or $315,000 for taking business owners filing a combined return.

  • Home office

Do you use an extra room in your house or apartment as a home office? Excellent news! That means you’ll most likely be able to itemize deductions for your home’s business usage, such as mortgage interest, insurance, utilities, repairs, and depreciation. 

Small-business owners can claim $5 for every square foot of their headquarters, limited to 300 square feet, under the more straightforward form of this deduction.

However, keep in mind that you can only claim this benefit if your home office is being used entirely for business activities regularly. It’s not going to work if your home office also serves as a guest room for your mother when she visits.

  • Business vehicles

Many small-business entrepreneurs rely on vehicles to get things done, whether traveling to and from consultations or using a tractor-trailer to haul construction machinery from job site to job site. 

You can deduct car payments from your income if you demonstrate using it for business reasons. There are two ways to claim this deduction:

Using the average kilometer rate. To calculate your claim, add all of the miles you went to work and multiply by the IRS’s standard deduction rate. The regular mileage rate in 2019 is 58 cents for each mile. 3 For example, if you traveled 5,000 miles for business in 2019, you can claim $2,900 from your taxes.

Using all of your actual driving costs. This alternative will require a little more effort. If you keep accurate records year-round, you can calculate how much your vehicle lost and spend on gas, maintenance, tires, tune-ups, vehicle insurance, and registration costs for business purposes. That will be your deductions instead of the miles.

You can choose either way, depending on how fuel-efficient your car is, how much it costs you to drive it during the year, and how effectively you keep track of your automobile-related expenses. But whatever your choice is, it’s still a good idea to keep proper records of your vehicle bills and digitize them with Shoeboxed to keep yourself prepared for tax season! 

About Shoeboxed

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!