How the Self-Employed Pays Taxes

If you do freelance work or own your own business, file your return on eFile.com so you do not have to pay the high up-charge like you do on other popular tax filing websites for self-employed returns. See savings up to 60% versus other tax preparation platforms when you file a self-employed return with Schedule C and other IRS and state forms.

On this page:

• The difference between a self-employed person, a contract employee, and a wage employee
• The Qualified Business Income (QBI) Deduction
• Other self-employment deductions
• Estimated tax payments - for more extensive details, see who needs to make estimated tax payments.

Am I self-employed? Let's find out.

Contractor Versus Wage Employee

Many companies hire workers on contract for certain kinds of work. These are independent contractors who, instead of receiving a W-2 with taxes withheld, receive a 1099-MISC or 1099-NEC for their work. If you pick up and deliverer groceries as a job, drive passengers from place to place, or pick up food orders for someone, you may be employed as an independent contractor. Additionally, those who perform freelance work are generally signed to work on a contract. As such, you may be able to deduct expenses, like home office expenses and/or gas and mileage on your tax return.

If you work on your own and you are not an employee, you will pay taxes a little differently than employees do. As a self employed individual, you are required to pay federal incomes taxes, Social Security, and Medicare taxes on your own, either through quarterly estimated tax payments or when you file your tax return. If your estimated tax payments are too large, you will be owed a refund; if too small, you will owe tax.

Taxes must be paid on income as you earn it. If you do not pay enough tax throughout the year, you could be assessed penalties. You must file a tax return if your total self-employment income is a least $400. This is different compared to if you are an employee and these payments are automatically withheld from your pay and paid partially for you by your employer.

Ready to file? See quick eFile app instructions:

• Where to add one or multiple 1099-NEC or 1099-MISC forms
• Add Form 1099-K to your business income
• How to add Form 1099-PATR if you received one.

Samples of Non Wage Income Types

The easiest and most accurate way to pay self employment taxes with your tax return is to start a free tax return on eFile.com. Based on your answers to the tax questions, we will determine whether or not you have to pay self employment taxes and will calculate the amounts. You can then pay them when you file your return and we will also generate estimated tax payment amounts and vouchers that you can use to pay your taxes throughout the year.

Self-Employed or Employee

You are considered self-employed if you carry on a trade or business (not just a hobby) or you are in business for yourself whether it is full-time or part-time. A self employed person can be a sole proprietorship, an independent contractor, or a freelancer. You are considered self employed even if you are paid in cash and do not receive a 1099-MISC or 1099-NEC. Are you part of the new gig or shared economy and not sure how to report Income from that activity or how to estimate and file taxes?

See a comprehensive Small Business Tax Guide if you complete Schedule C. Use eFile.com to prepare your small business tax return and discuss your situation with one of our Taxperts^®; self-prepare, but not alone!

Here is a quick look at how you get paid being self employed versus as an employee:

Being self-employed (business owner or a contractor) depends on these three factors:

• Behavioral Control: How does the company or organization for which you work direct and control what work you do and how your work is done (using instructions, training, or other methods)? This may include what tools to use, what assistants to hire, or when to purchase supplies or services.
• Financial Control: Who has the right to direct and control the business and financial aspects of your job?
• Type of Relationship: How do you and the business relate based on your work or job? Are there contracts that describe the working relationship between you and the company? How do these documents characterize your role in the business?

Refer to the chart below to find out how these 3 factors determine if you are self-employed:

Types of Self Employment

There are certain types of self-employment that may be considered when earning income not from working for an employer. Below are some examples on those who may be considered self-employed.

Independent Contractor

You are considered an independent contractor if the person or organization that pays you has the right to direct and control only the result of the work and not what work will be done or how it will be done.

• Examples of Independent Contractors: doctors, dentists, veterinarians, lawyers, accountants, public notaries, carpenters, electricians, plumbers, mechanics, stonemasons, home remodelers, housecleaners, lawn care providers, babysitters, news carriers, software developers, web designers, graphic artists, entertainers, guest speakers, truckers, cab drivers, farm workers, interpreters, project managers, hairstylists, salespeople, and freelance writers.
• Independent Contractor Income: compensation you receive for doing work or providing services as a self-employed individual, not as an employee. If you are self-employed and an independent contractor, your compensation is reported on Form 1099-MISC or Form 1099-NEC (along with rents, royalties, and other types of income). If you received a 1099 form instead of a W-2 , then the payer of your income did not consider you an employee and did not withhold federal income tax or Social Security and Medicare tax. A 1099-MISC or NEC means that you are classified as an independent contractor and independent contractors are self-employed.

Trade or Business

A trade or business, in general terms, is an activity carried out to make a profit. Even if you don't actually actually make a profit, you are still carrying out a trade or business as long as your motive is to make a profit and you make regular, ongoing efforts to further the interests of your business. A trade or business may be full-time or part-time and it may be carried out in addition to regular employment.

Hobby Income

A hobby is not a trade or business. If you carry on an activity that occasionally produces income, but your main purpose for pursuing the activity is not for profit, then you might be engaged in a hobby. Hobby income should be reported as other income on your tax return. If you itemize deductions, you can deduct hobby expenses up to the amount of your hobby income. See the tax return filing requirements to find out if your hobby income requires you to file a tax return.

Self-Employment and Taxes

As a self-employed individual, you are responsible for paying income taxes and self-employment taxes. Self-employment taxes are paid in addition to regular income taxes. Self-employment tax is made up of Social Security and Medicare taxes.

When you prepare your return on eFile.com, you will be asked if you own a business or have received a Form 1099-MISC, 1099-NEC, or a Schedule K-1. Based on the answers you provide, eFile.com will help you report your business income and expenses by providing the forms that you will need and asking for the information that needs to be reported on each form.

A Schedule SE - eFileIT - is used to calculate your self-employment tax. We will generate the Schedule SE for you. You can also adjust any of the amounts on your Schedule SE that are automatically calculated if this is necessary.

Qualified Business Income (or QBI) Deduction

The Qualified Business Income deduction (or QBI deduction) was created as a result of tax reform; it started for 2018 tax returns and will last through 2025. The QBI deduction allows you to deduct up to 20% of qualified business income if you are self-employed or are a small business owner. The deduction is allowed whether you itemize or not since it is done on a separate form (Form 8995 eFileIT). The deductible amount depends on your total taxable income including wages, interest, and capital gains in addition to income generated by your business. The deduction limits are based on the income level and type of business.

When you prepare and e-file your return on eFile.com, you don't need to worry about income levels and how to calculate the QBI deduction as we will do all that for you.

In the table below, find the QBI Deduction phaseout threshold by tax year. For your filing status, your QBI Deduction will begin to phaseout at the AGI amount before being reduced to 0% if your income reaches the phaseout maximum.

QBI by Tax Year

Refer to the table below for the Qualified Business Income Deduction by tax year for planning purposes or back taxes.

Self-Employed Tax Deductions

There are many self-employed or small business tax deductions you can claim on your taxes as a self-employed person. This includes business expenses, such as office supplies, deductible business miles, and tools or equipment for your business. Below, find other deductible expenses to claim on your taxes.

Self Employed Health Insurance Premium

The self-employed health insurance premium - medical insurance, dental insurance, and qualified long-term care insurance - may be up to a 100% tax deduction on your 1040 tax return if you showed a profit for the year. As self employed, you can also deduct the health insurance premiums paid for your spouse, dependents, and children who are younger than 27 at the end of the tax year, even if the children aren’t your dependents. Your health insurance from the Marketplace is reported on Form 1095-A.

If you’re also eligible for a premium tax credit, only the part of the premium you pay yourself is deductible. The eFile.com tax app will guide you through this when you prepare and eFile your taxes.

Let's say your annual health insurance premium was $5,000 and your profit for the year was $8,000: you could deduct 100% of your premium. With a $5,000 premium and a $4,000 profit, you could deduct $4,000. If your business showed a loss, you could not deduct any self-employed health premium payment.

For qualified long-term care insurance, there are limits based on age. You may be able to deduct up to a certain amount on your return - see the linked page for details.

Keep in mind, you can’t take the premium deduction if you were eligible for group insurance from your or your spouse’s employer. Included are reimbursements via a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). The total amount of payments and reimbursements for a QSEHRA cannot exceed $5,450 and $11,050 for family coverage.

The self-employed health insurance deduction will show on Line 16 on Schedule 1 of your 1040 tax return.

Self Employed Retirement Plans

As a self-employed person, you can set up your own retirement plan and deduct some or even all of your contributions when you are not covered by a workplace retirement plan. Self-employed SEP, SIMPLE contributions will will show on Line 15 on Schedule 1 of your 1040 tax return. See more information on retirement and taxes or view this IRS Publication on Retirement Plans for Small Business - SEP, SIMPLE and Qualified Plans.

Estimated Taxes

If you are self-employed and you expect to owe $1,000 or more in taxes when you file your return, then the IRS requires you to make quarterly estimated tax payments. Estimated tax payments are used to pay income tax and self-employment tax. If you do not pay enough tax throughout the year via estimated tax payments to cover your tax liability, then you will be charged a penalty by the IRS. The tax penalty is calculated on your tax return and added to the amount you owe or subtracted from your tax refund.

How to Pay Estimated Taxes

When you prepare and e-file your return on eFile.com and include your self employment income, we will calculate your quarterly estimated taxes that you should pay in the next tax year. We will also prepare vouchers you can use to mail in your payments to the IRS on the dates that they are due - not recommended, use the amounts on the vouchers and pay taxes online instead. You don't need to do any calculations, we do all the work for you.

We recommend making estimated tax payments electronically online. You can pay online using a credit card, debit card, or electronic funds withdrawal. If you make your payments online, you do not have to mail vouchers to the IRS. Use this IRS link and select Estimated Tax as the Reason for Payment and apply it to 1040ES.

IRS Payment Portal

You can calculate and make estimated tax payments on your own using Form 1040-ES - FileIT. Use the included worksheet to figure the amount of your estimated tax payments. You don't need to send this worksheet to the IRS, but you should keep it for your records. The booklet also contains four payment vouchers which you can use to make your quarterly payments if you are paying by check or money order. Fill out the appropriate voucher and enclose it in the envelope with your check or money order made out to "United States Treasury". You can find the mailing address to use on the "Where to File..." chart included in the 1040-ES booklet.

When to Pay Estimated Taxes

You may have to pay estimated income tax four times throughout the year (quarterly) because you do not have taxes withheld from your pay by an employer. The quarterly tax payment periods for the tax year are in the chart below - make sure you are paying for the current tax year before submitting your payment.

If you are making an estimated tax payment by mail, your payment will be considered on time if it is postmarked on the due date. If the due date falls on a Saturday, Sunday, or legal holiday, you will be on time if your payment is made on the next business day. If you want or need to make additional payments than just the quarterly ones, make a copy of a payment voucher and mail it in with your additional payment or pay online. However, make sure that you pay enough by each due date to cover the preceding payment period.

Read this publication on retirement plans for small business or independent contractors.

Church Employees' Self Employment Tax

If you had $108.28 or more in church employee income, then you must pay self-employment tax. Church employee income is income received from a church or church-controlled organization, not including income paid to ministers or members of religious orders. If you are a minister (or priest, rabbi, etc.), a member of a religious order NOT under a vow of poverty, or a Christian Science practitioner, and you have a conscientious objection to Social Security insurance, you may exempt your net earnings from self employment tax by filing Form 4361. Under certain circumstances, if you have a conscientious objection to Social Security because of your membership in a religious sect, you may be able to exempt your net income from self-employment tax by filing Form 4029.

If you receive salaries, fees, allowances, or other compensation (housing, food) for doing work as a minister or member of a religious order, you generally have to pay self employment tax on your income. You may exempt your ministerial income from self-employment tax if you file Form 4361 and you receive an approval from the IRS. Income derived from other sources may still be subject to self-employment tax.

Spouses with a Joint Business Venture

In general, a husband and wife—husband/husband or wife/wife—who jointly own an unincorporated business must file taxes for the business as a partnership. However, partnership tax returns and recordkeeping can get very complicated, so the IRS has made an exception. If a husband and wife are the only members of a joint venture (a fancy name for a business owned by two or more people), then they may agree together to elect for their business NOT to be treated as a partnership for federal tax purposes. Instead, it will be a Qualified Joint Venture. Then, the couple files a joint tax return and prepares a separate Schedule C for each spouse, taking into account each spouse's share of income and loss derived from the business as if they were each a sole proprietor. Only couples that are married filing jointly can elect for their business to be a Qualified Joint Venture. Corporations and LLC's do not qualify for this election.

More Information on Self-Employment Taxes:

• Independent Contractor and Taxes
• How to Prepare a Tax Return with a 1099 Form
• Employee Expenses and Job Deductions
• Home Office Deductions and Expenses.

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