Self-Employed Taxes for Dummies: Everything you need to know

Self employed taxes for dummies

Self-Employed taxes are often misunderstood and can leave you with a nice tax bill if you have not planned accordingly. If you intend to run a successful business this is something you must understand. We know it can be a little confusing so we are going to simplify this to the point where we are going to call this article self-employed taxes for dummies.

As a Certified Public Accountant who runs his own firm, I see so many mistakes people make when it comes to their taxes, especially Self-employed taxes, and I’m here to rectify that.

The strategies I’m going to share today will save you tens of thousands of dollars. So, let’s first start with the basics.

This post contains affiliate links, which means I may receive a small commission, at no cost to you, if you make a purchase through a link.   

What are Self-Employed Taxes?

If you’ve worked as a W2 employee you might have seen a FICA tax on your pay stub.

FICA tax are taxes that Americans pay into the Social Security and Medicare system for older people to get their health care needs and Medicare needs met. Employees pay FICA taxes too but their employer pays half of these taxes (7.65%) and they pay the other half.

However, when you’re self-employed you pay the entire amount of FICA taxes which is 15.3%!

Here’s how the Self-employed Tax is broken down:

12.4% of your income goes toward Social Security and 2.9% goes to Medicare totaling 15.3%.

Let’s say, someone starts a business and earns $100,000. The average business owner that doesn’t know about self-employment taxes would probably think they only have to pay federal and state taxes on this money. If the average federal tax rate is 25% and average State tax rate is 5% they’re only thinking they probably have to pay around 30% in taxes, but they will be sadly mistaken. 

Come tax time they’re also going to have to pay an additional 15.3% in self employment taxes. That’s $15,300 extra dollars in taxes that most people did not plan for, so it is vital that you plan for self employment taxes.  

It’s also vital that you save for these taxes as well, because when you add self-employment taxes to the mix, you can be looking at 40% plus in taxes that’s going to be due on all income made from your business.   

Who Pays Self-Employment taxes?

If you don’t make any money in your business or you have a net loss you don’t have to pay any self-employment taxes, but if you have a net gain (when your earned income is greater than your standard deduction) of at least $12,550 single or $25,100 married, you do have to pay self-employment taxes.

You do not need to pay self-employment tax on income that you earn from an employer if the employer withheld payroll taxes.

It kind of sucks when you become a business owner that you have to pay extra self-employment taxes, but there is something that you can do about this that many people don’t know about that can save you tens of thousands of dollars.

It’s called the S Corporation strategy. When you’re starting a business you start out as a Sole Proprietor or LLC. When you start earning over $40,000 in net income you’ll want to look into turning your business into a S Corporation.

The S Corp strategy is simply changing the status of your LLC or sole proprietor to be taxed as an S Corp and instead of paying the FICA taxes or self-employment taxes on all of the $100,000 of income, you would only need to pay self-employment taxes on the salary that you pay yourself.

You can pay yourself a reasonable salary of 25-40% of your income depending on your industry.

Don’t worry you’ll still have access to the money you earn from your business, but you’ll just be withdrawing from it differently.

The money you’re earning from your business should be deposited to your business bank account. If you need to withdraw more than the salary you give yourself, you’ll withdraw the money and it will be taken out as a distribution which is taxed differently and a lot lower than if you were paying yourself a salary. To learn more about this amazing strategy and how to pay yourself properly, be sure to use this guide as a resource!

So in our example, if you have $100,000 in net income and you paid yourself a $25,000 salary, you will only have self-employment taxes of $3,800 ($25,000 *15.3%) vs the prior scenario where you’d have to pay $15,300 in self-employment taxes.

Do you see the difference? That’s $11,500 in savings by simply changing your business entity! Do you see the importance of understanding self-employed taxes and structuring your business the right way? This literally saves you tens of thousands of dollars.

If you see your business growing rapidly, seek a Certified Public Account to make sure your business is structured properly as an S-Corp to decrease the amount you have to pay in taxes.

As an accountant I believe you should pay your fair share of taxes, but don’t leave a tip.

This is one of the many things I teach in my course Deduct Everything – Your Blueprint to Tax Free Living!

The average person pays 40% of their lifetime income to Uncle Sam. That’s a heck of a lot of money that you’re just giving away because of lack of knowledge,

I’m on a mission to help as many people as I can keep more money in their pockets. I’m limited to only so many clients, so I put everything I know into a course that shows you how to:

• Save Over $100,000 in Taxes by Implementing these little-known Strategies!
• Turn Your Personal Expenses into Business Expenses!
• Pay Your Children Tax-Free & Build Generational Wealth!
• Make Your Entire Lifestyle Tax Deductible!

You can check it out for 60% off here.

It’s how you structure your business and the DEDUCTIONS that help you reduce the amount you pay in taxes.

90% of business owners overpay taxes because they miss out on deductions. In my course I outline all of the deductions you’re entitled to and I help you deduct everything!

Next step is to understand how to file your taxes.

How to file your Self-Employment Taxes

Use Schedule C of Form 1040 to calculate your net self-employment income. The amount on Line 31 “Net Profit or (Loss)” is the amount used to calculate self-employment tax. 

Using these forms will give you your calculated income or loss. Take this number and then use Schedule SE (Form 1040) to calculate how much self-employment tax you should have paid throughout the year.

If you file a joint return with another self-employed person, you must calculate your self-employment taxes separately.

The self-employment tax calculation can be complicated. I recommend using a tax preparation software or seek a Certified Public Account to do this for you.

In addition to filing an annual tax return, you generally have to make quarterly estimated tax payments if you are self-employed. Filling out the form’s worksheet will determine whether you need to file quarterly estimated taxes or not.

Quarterly Estimated Taxes for the Self-Employed

Per the IRS, Estimated tax is the method used to pay Social Security and Medicare taxes and income tax for the self-employed, because you do not have an employer withholding these taxes for you.

Form 1040-ES, Estimated Tax for Individuals PDF, is used to figure these taxes. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.

If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If your estimated earnings are too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.

To pay your estimated taxes, you can use:
         – The IRS Direct Pay website
         – The Electronic Federal Tax Payment System
         – IRS payment vouchers if you mail your payment for each quarter (see IRS Form 1040-ES)

So do you now have a better understanding of self-employment taxes and how to reduce the amount you pay in taxes? We don’t like to call this article self-employed taxes for dummies, but we do hope we simplified it enough.

Now that you know about self-employed taxes, here are some additional tax tips you’ll want to know if you own a business and additional savings on my deduct everything course.

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Also, if you know of any other’s starting a business we created this list of best gifts for entrepreneurs to help support and motivate them. There’s nothing like having support. Remember when you were first getting started?