Want to learn how to declare self-employment income on taxes? The last thing you want to do is get in trouble with the IRS after trying to pay your taxes accurately, only to discover you missed a key step or declared your income in the wrong spot.
Many people are turning to self-employment as a way to make a living. However, self-employment isn’t as easy as some may think! The tax implications alone are enough to make self-employment very stressful to deal with. That’s why it’s important to understand the tax side of things so that if you choose self-employment as a way to make money, you aren’t caught off guard.
And, in this complete guide, you’ll learn exactly how to declare self-employment income. We’ll talk about why declaring your income correctly is so important for self-employment taxes. You’ll also learn exactly where to declare self-employment income on taxes. Let’s start with a brief overview of this topic.
A Brief Overview of Self-Employment Income
In order to fully understand self-employment tax, you must first understand self-employment. If an individual is self-employed, they do not work for an employer. This means they also don’t make a consistent salary or wage from an employer.
Instead, people who are self-employed, also known as independent contractors, earn money from conducting business with a payer. Most of the time, the payer will not withhold taxes for a self-employed individual. This leaves the entire responsibility to the individual doing the work.
Who is Considered Self-Employed?
If you want to find out if you’re considered self-employed, there are a few different things to keep in mind. Even side gigs can be considered a form of self-employment! An individual can be considered self-employed if they:
- Are the sole proprietor of an unincorporated business
- Are an independent contractor
- Work as a consultant or freelance
- Are a part of a limited liability company (LLC)
- Earn income through investments (even rental property)
- Work with the intent to make a profit (even if they don’t earn any)
- Have regular transactions from their business or trade
- Produce income from their business or trade
- Make decisions for the sake of continuing their business or trade
You can get a better understanding of who is considered self-employed by reviewing the Internal Revenue Service’s (IRS) Website. The IRS has a simple definition of who is considered self-employed. According to the IRS, typically individuals are self-employed if any of the following conditions apply:
- An individual carries on a trade or business as an independent contractor or sole proprietor
- A person is a part of a partnership that carries on a trade or business
- An individual is in business for themselves (this includes part-time business)
Self-Employment Income & Tax Obligations
Self-employment tax is different from the taxes of a typical employee. That is because a typical W-2 employee will be responsible for a tax rate of 7.65%. The other half would be covered by the employer. However, individuals that are self-employed, they are responsible for the entire 15.3%. Thus, self employment taxes are higher. Thanks, Uncle Sam!
The person who pays a self-employed individual must provide a tax form. Recipients of this self-employment income can expect to receive either a 1099-NEC, 1099-MISC, or a 1099-K. However, if an individual doesn’t receive any of these forms, they are still responsible for reporting their income and expenses from self-employment on their tax return.
How to Declare Self-Employment Income on Taxes
Ready to learn how to declare self employment income on this year’s tax form? We’re going to guide you through the process step by step below. And, the first step is figuring out your net income.
Figure Out Your Net Income First
In order to properly declare your self-employment taxes, you must first figure out how much money you made. You need to compare your income to your business expenses so that you can find your net earnings. Your net earnings are what self-employment tax is based on. For example, if your business expenses were $50,000 but you made $100,000 then you have a net-earnings total of $50,000.
The self-employment tax rate is 15.3% but can be broken down into two different numbers. 12.4% is for Social Security tax and 2.9% is for Medicare tax. It is important to keep in mind that only up to $142,800 of your net earnings can be eligible for the Social Security tax. That means depending on how much you make, you may see a different tax amount due compared to another self-employed individual.
Where to Declare Self Employment Income on Tax Form
Now that you know your net earnings, you want to get IRS form SE, Self-Employment Tax from the IRS website. Here you will provide details like your self-employment profit. You will then want to multiply the amount on Form SE by .9235 (since only 92.35% of your net earnings can be taxed). So if your net earnings were $50,000, that number multiplied by .9235 would be $46,175. That is the amount that is subject to self-employment tax. Then multiply that number by .153 (the self-employment tax rate).
However, as we mentioned above the Social Security portion of that tax rate is only applicable for up to $142,800 of your net earnings. This math can be hard which is why we recommend that you get help from a professional to ensure that you are submitting the right information to the IRS. Learn more about this in our article discussing how much self employment income is taxable.
How to Make Quarterly Estimated Tax Payments for Self Employment Income
While you came here primarily to learn how to declare self-employment income and pay annual taxes, we’re going to talk about something you need to get in the habit of doing as a self-employed person: making quarter payments! This will help break down your tax bill into smaller, more manageable self-employment tax payments.
Another component of self-employment taxes is the fact that individuals need to make payments throughout the year, not just by the annual filing deadline. If a person waits for one payment at the end of the year, they are subject to late payment penalties. In order to properly calculate your quarterly estimated tax payments, you have to estimate your adjusted gross income, taxable income, taxes, deductions, and credits for the entire year. This can be extremely difficult to do on your own! The IRS provides a few different methods when it comes to submitting these payments. An individual can:
- Credit an overpayment on your previous year’s tax returns towards your next year’s taxes
- Mail your payment and payment voucher with Form 1040-ES
- Pay over the phone
- Pay online
- Have the funds electronically withdrawn
How to Actually File an Annual Return
If you want to file your annual tax return, you will need to use Schedule C to report your income and losses (if any) of your self-employment. In order to report your self-employment tax, you need to file Schedule SE (Form 1040 or 1040-SR). The information on Schedule C will be able to help you fill these out.
We will sound like a broken record but we recommend that you file an annual return with a professional accountant who can walk you through every step. However, if you want to file an annual return yourself, you will need to get the appropriate tax forms. For more information, visit the IRS website where they can go over what you need to do.
Final thoughts on Where & How to Declare Self Employment Income on Tax Forms
That concludes our complete guide on declaring income from self-employment on your taxes. Now, you should feel so much more confident in managing your taxes yourself. We do still recommend professional help, though – it’s worth it. Trust us. The last thing you want is to have your self employment wages garnished.
When you choose the path of self-employment, you also choose to handle the tax side of things (not just reap the benefits of self-employment income). Understanding the taxes of self-employment can be difficult. In order to fully understand the tax aspect, you must first look at what self-employment means.
Individuals that deal with self-employment tax must look at their net earnings, not just their income. 92.35% of their net earnings are subject to the self-employment tax rate of 15.3%. It is also important to keep in mind that the self-employment tax rate is the sum of two numbers. Both a Social Security tax rate and a Medicare tax rate. The Social Security tax rate is only applicable on up to $142,800 of your net earnings. Due to all of these factors, we recommend that you get help from a professional to make sure you are submitting accurate information to the IRS. Want to learn more? Check out our article on self employment for retirees!