Tax Filing 101: Filing Self-Employment Taxes

Andrew Steffensmeier

Small business preparation and planning, investment advisory services, business tax planning services

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As tax season rolls around, a large portion of the Norfolk population may find it challenging to complete their taxes properly. This becomes especially true as more people venture out of the traditional workforce and into self-employment, taking on more complex filing.

Of the nearly 25,000 people living in Norfolk, Nebraska, at least 6.5% (or about 1,625 people) classify themselves as self-employed in their own business. This figure is expected to rise in the coming years as more workers gravitate towards freelance, gig work, and opening their own businesses. According to Forbes, at least 20% (or 10 million people) in the nation are currently considering doing at least one of the three. 

More often than not, Nebraska business owners feel overwhelmed by the process and need a one-stop shop to find accurate, straightforward guidance on how to file their taxes. Here’s your basic how-to for filing your self-employment taxes as a beginner. 

WHAT IS SELF-EMPLOYMENT TAX

Much like the same Social Security and Medicare taxes withheld from most wage earners, self-employment taxes (SE tax) refer to the sum of Social Security and Medicare taxes you owe the government. It is by no means the only taxes you will have to pay as a self-employed worker, but it is mandatory for most SE workers.

Since it isn’t automatically deducted from your income, there are a few more steps you will have to take to pay these federal taxes that a typical wage earner would not. 

Qualifications

Two qualifications require you to pay self-employment taxes: making more than $400 (not including church earnings) or making $108.28 or more as a church employee. You still qualify for the SE tax if you fall under either (or both) of these qualifications, even if you’re currently receiving Medicare or Social Security support. 

Entity

As you navigate your journey as a business owner, you must understand what business structure you fall under. According to TurboTax, “Whether your company will be a sole proprietorship, an LLC, a partnership, an S-corporation, or C-corporation will affect how your taxable income flows through to your personal tax return.”

If you have an LLC, or a legal business structure, you must file as a sole proprietor, partnership, an S-corporation, or C-corporation. If you’re a sole proprietor, you own your unincorporated business yourself and must report your income and expenses on a Schedule C form. 

A partnership refers to having a business partner, and you can file your business as a partnership or corporation, typically under a Form 1065. Unlike sole proprietors and partnerships, C-corporation is a separate entity, earning special deductions and being taxed at a corporate level. S-corporation is more like a partnership in the sense that your income is on your personal tax return but is still subjected to a set salary and corporate-level payroll taxes. 

What you need

To file your SE tax, you will need one of the following:

  • Your Social Security Number (SSN) or
  • Your Individual Taxpayer Identification Number (ITIN)

If you have lost or misplaced your SSN, you can call (800) 772-1213 to reach the Social Security Administration office. The IRS adds that “The IRS will issue you an ITIN if you are a non-resident or resident alien, and you do not have and are not eligible to get an SSN.” You just need to fill out Form W-7

What you will have to pay 

Your SE tax is imposed strictly on the federal level. The total amount you pay will depend on your deductions, state taxes, licenses, fees, and permits. However, the IRS breaks down what you will owe for the SE tax rate as follows:

“The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).”

HOW TO FILE SELF-EMPLOYMENT TAXES

Self-employed individuals who expect to owe more than $1,000 in taxes should file quarterly since no tax is automatically withheld. This will allow you to avoid owing one large lump sum at the end of the year. A tax calendar is incredibly beneficial as a new business owner in Norfolk since it has all four Quarters and the due dates for getting your taxes in.

Calculate Self-Employment Income

Calculate your self-employment income with the following formula:

Gross Income — Business Expenses = SE Income

Keep in mind that after you calculate this figure, at least 92.35% of your earnings are subject to tax.

After determining your income, apply the 15.3% rate

After calculating your SE income, you’ll need to apply your 15.3% SE tax rate to determine how much you how for this federal tax. For instance, if you made $100,000, you’ll owe $15,300.

$100,000 X 0.153 = $15,300

Remember, however, that only the first $142,800 of your earnings is subject to the social security tax.  

IRS Schedule C tax form

An IRS Schedule C, or Form 1040, is used to report your business’s income or loss as a sole proprietor. The IRS qualifies an activity as a business if your primary purpose for engaging in the activity is for income or profit or if you are involved in the activity with continuity and regularity.

To fill out your Schedule C, you will need to make the following calculations:

  1. Calculate how much self-employment tax you owe
  2. Calculate Deductions

When It Gets Too Overwhelming, Consult a CPA

A lot goes into ensuring your self-employed taxes are filled out and filed correctly, and it’s common to get overwhelmed with the process. Working with a CPA (Certified Public Accountant) like McMill CPAs and Advisors will improve your efficiency, increase accuracy, save you money, and offer you expert insight and guidance. 

McMill is here to help Norfolk, Nebraska small business owners file their taxes. When you’re ready, contact us for more information on how we can help ease the burden of tax season.