The number of people who are working for themselves continues to grow…
This means millions more Americans are responsible for reporting self-employment income and keeping track of the taxes they owe.
Business tax preparation can be tricky for those new to the self-employment ranks, requiring taxpayers who work for themselves to account fully for their earnings and to pay taxes they owe on time. It’s one of the responsibilities of working for yourself, handling your tax obligations because there is no employer withholding the necessary amounts from each paycheck to send to the Internal Revenue Service.
Even before the global pandemic in 2020 left millions of people looking for work, trends revealed an increase in the number of workers who reported some type of self-employment income, according to Forbes. The Forbes report noted that 44 million, or more than a quarter of U.S. workers, identified some type of self-employment before the pandemic.
As millions of Americans turn to some form of self-employment for their income, they must learn to handle the self-employment tax as well as the income tax on their earnings. That’s why it may be useful to seek the guidance of a tax professional to ensure that all income and business deductions are properly accounted for and all necessary taxes are paid to the IRS on time.
For example, self-employed workers are responsible…
for setting aside some of their earnings to cover the Social Security and Medicare taxes that routinely are withheld by employers. A worker’s employer pays half of the Social Security and Medicare taxes, or just under 8 percent of a worker’s gross income. But a self-employed worker is responsible for paying the entire 15.3 percent tax, which amounts to a 12.4 percent tax on gross income paid to Social Security and 2.9 percent paid to Medicare.
Payment of the self-employment tax covering Social Security and Medicare is necessary for those taxpayers whose wages come primarily from working on their own. However, those employees who work for a business full-time that regularly deducts these taxes from their paychecks may have additional income from self-employment that does not require more payments of Social Security and Medicare taxes. But you should check with a tax professional to determine if your amount of self-employment income requires additional withholding.
It’s important to set aside some portion of self-employment earnings to cover tax obligations, both for self-employment tax and income tax purposes. The IRS also requires tax payments quarterly for self-employed workers who expect to owe more than $1,000 in self-employment tax over the course of a year. These quarterly tax payments, estimated based on anticipated annual income, serve the same purpose as the withholding of taxes done by a worker’s employer throughout the year. Failure to make those quarterly tax payments can lead to penalties levied by the IRS.