Thinking about filing self-employment taxes as a freelancer? Learn how to with these tips.
You can’t turn on the news without catching a snippet about the “Great Resignation” that’s taken the United States by storm. Maybe you’re one of the more than 4.5 million individuals who have resigned from the traditional workforce to try your hand at self-employment.
As the calendar year turned, you most likely have been hit in the face with the fact that your employer is no longer taking taxes out of your regular pay. You’ve just figured out that you’re your employer, and that’s all on you! Don’t panic. Here’s what you need to know about self-employment tax.
Who is responsible for filing self-employment tax?
According to the IRS, you are considered to be self-employed if you are:
- A sole proprietor of a business or independent contractor — even if it’s part-time
- In a partnership running a business or specializing in a trade
- A freelancer in business for yourself
The IRS’s self-employment income bar is relatively low, too. You need to file self-employment taxes if you have netted:
- $400 in your business income
- $108.28 in church employee income
Income you might not realize is self-employment
When thinking about self-employment taxes, people often overlook those side hustles they take on to earn a little money. Some of these could include:
- Rental income — whether it be for an entire dwelling or a room
- Craft fairs
- Repairs that you do on the side
- Cleaning houses or offices
- Newspaper deliveries (for those over 18)
- Land rented as event parking or camping
- Department of Agriculture subsidies for your participation in a program
There are special considerations farmers and small commercial fishing industries get. It is best to consult a tax professional to get appropriate and accurate tax treatment.
Well, then, is self-employment tax the same as income tax?
No. You calculate self-employment tax off of your net income, but it is not the same as your income tax rate and calculation.
Self-employment tax has to do with the employer-related tax assessed to cover social security and Medicare expenses. For 2021, the total amount you were responsible for self-employment tax equaled approximately 15.3% of your income, up to $142,800.
In 2022, the self-employment tax deduction rates stay the same — 15.3%. The maximum income to which those rates are applied increases to $147,000.
Self-employment tax has to do with the employer-related tax assessed to cover social security and Medicare expenses.
Social security deductions
As a self-employed individual, you are responsible for contributing to the social security fund for both the employer and the employee portion of the assessment. For the tax year 2021, social security deductions were calculated at:
- 4% for the first $142,800 of your income. That is 6.2% for each the employer and employee portions
- After $142,800 in revenue, the social security limit had been met for the year
- In 2022, that ceiling is now $147,000
Similar to the social security portion of your tax, you are responsible for both the employer and employee portions of Medicare contributions. For 2021, the Medicare deduction was to be calculated based on:
- 9% of the first $142,800 of your income in 2021; $147,000 in 2022 — 1.45% for each employer and employee portion.
- The difference for Medicare comes in when you make $200,000 or more ($250,000 or more if married and filing jointly or $125,000 if married and filing separately). At that point, there is an additional, or supplemental, .9% Medicare tax assessed on all extra income above that level.
Note: If your business functions on a fiscal rather than a calendar year, your self-employment taxes must be calculated on the active tax rate at the beginning of your business year.
What forms do I have to use to file my self-employment tax?
To avoid being assessed any fines, the IRS strongly suggests you file quarterly estimated taxes, so you can keep up with your filing responsibilities in a more manageable fashion.
To do this, you will use form 1040-ES each quarter to report and pay your estimated income and resulting self-employment tax calculation.
Remember to claim your deductions
Your self-employment tax is based on your net income. This means that you should calculate it after you apply your deductions. Have you taken into consideration:
- Your home office space that you use? This is both your physical space and the associated utility expenses.
- Office supplies you needed to buy?
- Networking events you paid to attend?
- Software or other tools required to do your work?
- Mileage to visit clients?
- Fees paid to obtain or retain your business license?
- Medical insurance premiums?
- Continuing education expenses and materials
These are all cost-of-business-related deductions and are in addition to the standard deductions for which you are eligible.
The bottom line
Henry Wadsworth Longfellow told us, “Into every life a little rain must fall.” It’s unlikely he was thinking about self-employment taxes and the gig economy when he penned those words, but he may as well have been.
The good news for 2022 is that the only thing changing on the self-employment tax front from 2021 is that the maximum income level has increased to $147,000. Otherwise, the total social security and Medicare tax percentage deductions are the same.