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Freelancer's Quick Guide to Self-Employment Tax
Monday, 17 January 2022

The Self-Employment tax is determined on the Form 1040 Schedule SE. which amounts to 15.3% of a net business profit. This percentage also includes the Social Security and Medicare taxes. These taxes are usually shared with your employer, where you pay half and they pay the other have. But if you are both a freelancer and the employer, you pay both halves. This is the self-employment tax. You can ideally approach this tax via:

1) Paying monthly to the IRS

Via the form of estimated tax payments, you can send your IRS money towards your self-employment tax each month. These estimated payments are known as the quarterly estimated payments. Unless you skip payments in a financial quarter, you’re not going to be getting any penalties or interests imposed on, so don’t worry.

2) You can also pay quarterly

If paying monthly seems like a challenge on freelance profit, then you can send the IRS money on a quarterly basis. To do this, set aside $306 a month (or whatever you end up owing at the month’s end) in a different bank account. Don’t touch this money but keep it aside every month-end January, February, and March and by the time April comes in, you can send the payment two weeks before April 15.

Important note to keep in mind….

The $306 that you set aside is, unfortunately, just your self-employment tax which comprises of the Social Security and Medicare. It is not your entire tax liability. You still need to pay your income tax and this is where the estimating bit comes into play. A useful tool to use to calculate this would be a tax return calculator, such as Taxfyle Calculator. This gives you a rough estimate because you will not know the actual income tax liability for the year until the year ends. The tax bracket you are in also depends on your annual, and not monthly income.

Electronic Federal Tax Payments

For self-employed freelancers, you can enroll in the EFTPS which is the Electronic Federal Tax Payment System, to help you make monthly or quarterly estimated payments. It takes a few minutes to register and you can make your payments either by phone or online, which is the most preferred method. The payment can also be auto-debited from your checking account.

You can also use the IRS Direct Pay where you would need to enter your information each time you sign in to make a payment.

Final Thoughts

The payments you make to the IRS are not on the total income of your freelance money. You can deduct ‘ordinary and necessary’ business expenses from your earnings and only pay the self-employment tax and income tax on your balance, which is your net profit (not gross profit). For more help, you can check details about Tax Planning for Freelancers here.

The IRS is not that heartless and according to them, ordinary expenses are commonly occurring expenses for business such as fees and licenses. This caveat helps you determine the things you would be paying for and what is exempted.
 
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