Self Employment Taxes: An Overview
What follows is not tax advice. This information is provided as a reference only. For the most up-to-date information on tax laws consult a tax professional or speak to an IRS rep.
The Gig Economy and Self Employment Taxes
Even before the pandemic, many within the military community sought income from the “Gig Economy”. These are your Uber and Lyft drivers. They are personal shoppers who deliver groceries and other necessities on demand. It is self-employment income for military spouses whose obligations to their families and service members make traditional employment challenging, if not impossible.
Those who run their own small businesses or operate as independent contractors and gig workers, which also includes freelance writers like me, must be aware that there are tax issues and deadlines that differ from regular, W-2 positions.
The federal government takes the biggest bite out of your income by imposing a number of different taxes. These include:
- Income Tax
- Self-Employment Tax
- Estimated taxes (commonly called Quarterly Taxes)
- Employment Taxes
For anyone earning more than the minimum amount, there will be income taxes. On April 15th of each year, most of the time, you will file an annual income tax return with the Internal Revenue Service (IRS), showing your income and deductions for the previous year. You will also report how much you’ve paid in estimated taxes.
Self Employment Tax
The self employment tax rate is a percentage of your net earnings. In 2022, that worked out to be 15.3% of your net earnings. That is broken down further with 12.4% going to Social Security taxes and 2.9% for Medicare. These numbers are subject to change year to year, the 2022 numbers are provided as a reference only. Depending on the year, your experience may vary.
As a small business owner or gig worker, you do not receive a regular paycheck with taxes and other deductions already withheld, which is called payroll tax. Most notable of these deductions are Social Security and Medicare taxes. Whereas W-2 employees have their companies deduct those taxes for them, those who are self employed pay those taxes directly to the IRS.
If your earnings from self-employment are $400 or more, then you must pay this tax. When you file your annual tax return, you must include IRS Form SE, which shows how much Self Employment tax you’re required to pay.
To find how much you owe for self-employment taxes, you’ll generally use an IRS Schedule C, which is a tax form reporting your revenue and profit from your freelancing or gig work.
Again, since you do not have your taxes withheld by an employer as a self-employed worker, you must make payments to the IRS every quarter of the year. These are called Estimated Taxes. You file these on IRS Form 1040-ES.
Since these are quarterly taxes, the IRS has set the following dates by which you must file, under normal circumstances:
- April 15
- June 15
- September 15
- January 15
It is your responsibility to figure out how much to pay.
If you’re a gig worker, this tax will likely not apply to you. But, if you’re a small business owner and you hire employees, then you will pay employment taxes. These taxes include half of your workers’ Social Security and Medicare taxes and all of their federal unemployment tax. You will also withhold the other half of their Social Security and Medicare taxes, and all of their income taxes, from their paychecks.
You must then pay these taxes monthly or bimonthly via electronic deposit to the IRS.
There are too many variants between each state to list them all here, but you will also have to pay state taxes of some kind from your income. These can be:
- State Income Tax
- Employment Tax
- Sales Tax
- Excise Tax
- Local Taxes
Managing Your Tax Burden
MilTax, a resource available at Military OneSource, offers free tax services which include tax preparation and e-filing software. They also have MilTax Consultants who are available 24/7, which is just awesome!
These MilTax Consultants are also specifically trained to address issues that affect the military community. This includes deployments, special pays, housing and rentals, living overseas, and multistate filings. Additionally, they can assist military spouses and veterans who are working as independent contractors in the gig economy.
A resource I’ve come to depend on for managing my taxes and understanding the intricacies of self employment tax is Nolo.com.
While they do offer tax attorneys for hire, the greatest help for me has been their Tax Articles and books. I have many of their books, but the most helpful for my freelance work has been their Tax Guide for Gig Workers and Working as an Independent Contractor. These two resources have given me all the information I need to confidently work in the gig economy.
Here are other resources I use to stay on top of my tax game:
- 1800accountant.com Blog – This website is geared toward selling you their services, but they also offer great tax articles and breakdowns of legislation that affect your taxes.
- The IRS – While we often think of the IRS as the agency that takes our hard-earned money, and it is, their website offers all the information a taxpayer needs to correctly file taxes. Of greatest importance is the IRS Form Library where all the forms you’ll need are free and downloadable.
- Free Tax Return Preparation – The IRS offers Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs, which offer free basic tax return preparation to qualified individuals. Those with disabilities, those who make less than $57,000 per year, or those who speak limited English, will generally qualify for this service.
I am not a tax professional, and the information presented in this article is intended for informational use. The information contained within this article was sourced directly from the IRS and other professional tax websites.