What Is Self-Employment Tax, and When Is It Due in 2023?

A lot of people want to be their boss. For some people, being able to set their working hours and business decisions is liberating. No longer are you just a little spoke in the wheel!

However, it also entails more obligations and demands, including tax obligations. As a result of becoming self-employed, you will need to submit quarterly tax payments to the IRS four times every year. And if you get your calculations wrong, you can be subject to fines and more IRS scrutiny.

Self-Employment Tax: What Is It?

Self-employment tax is the term used to describe taxes paid by independent contractors to the federal Medicare and Social Security programs.

FICA is primarily used by employers to pay Medicare and Social Security taxes on behalf of their employees. Employers deduct a portion of employee earnings to cover this expense, and typically cover an additional portion themselves.

Both of those sections must be covered by self-employed people on their own.

Rate of Self-Employment Tax in 2022 and 2023

The self-employment tax rate was established by the IRS at 15.3 percent. That rate is made up of two separate taxes: a 2.9% Medicare tax and a 12.4% Social Security tax.

Your self-employment income is taxed under the Medicare program, but above a certain level, larger incomes are exempt from the Social Security tax. Only the first $147,000 of your earnings were subject to social security taxes in 2022. The Social Security tax is levied on the first $200,000 of self-employment income for the 2023 tax year.

Who Is Responsible for Self-Employment Tax?

Self-employed individuals who earn $400 or more are required to pay Social Security and Medicare taxes.

Depending on your relative income and the amount deducted by your employers, you might or might not have to pay additional taxes. Especially if you work numerous jobs and have at least one employer deducting revenue for FICA contributions.

How to Determine Your Self-Employment Tax

Your net income, which includes pay and tips, is used to determine how much self-employment tax you owe. You will be required to pay self-employment tax equal to 15.3 percent of your net earnings, provided your income does not exceed the established thresholds.

Self-Employment Taxes: How to File

Through IRS Direct Pay, you can pay self-employment taxes online. IRS Form 1040, Schedule SE can be used to compute and report your self-employment taxes.

To make payments online, you must, however, enter your Social Security Number or an Individual Taxpayer Identification Number.

Using a Social Security Number to Make Payments

You can apply for a number and card with the Social Security Office online if you are eligible for one but don’t already have one. This number will be used by the government to identify you and your records for tax-related purposes.

Using a Personal Taxpayer Identification Number to Make a Payment

You can fill out Form W-7 to apply for an Individual Taxpayer Identification Number if you need to pay taxes but are not qualified for a Social Security Number.

Self-Employment Tax Payment Using Estimated Taxes

An employer doesn’t wait until the end of the year to make payments when paying your taxes. As you generate income throughout the tax year, you are required to pay these income-based taxes.

That entails independent earners paying anticipated quarterly taxes. You can use IRS Form 1040-ES to estimate your payments and pay your quarterly estimated taxes online.

You must submit your expected payments by these quarterly dates in 2023 to avoid fees or penalties for late payments:

The first-quarter payment date: April 18, 2023
Paying for the second quarter: June 15, 2023
Payment for the Third Quarter: September 15, 2023
Final Payment Date: January 15, 2024

Tax Deductions for Self-Employed Individuals

For independent contractors, managing these recurring tax payments can be a considerable financial strain, particularly if they are unprepared. The good news is that you may be able to expand your savings and make up some of the money you’ve lost to taxes thanks to the vast range of available tax deductions.

Being self-employed entitles you to many acceptable tax deductions for small businesses because you are technically running your own company.

Deductions for Self-Employment Taxes

Even though self-employment entails additional taxes, you can deduct some tax payments as company costs. Your adjusted gross income can be used to offset the part of your self-employment taxes that an employer generally pays.

Home Office Tax Break

Even though many people work from home, not everyone is eligible to take a tax break for their home office. If your home office serves as your primary place of business, you can claim and deduct expenses linked to it. You must consistently and solely use one section of your home for work-related activities.

You can deduct a portion of your home expenses, such as electricity, internet, and rent or mortgage payments if you satisfy certain criteria.

Costs of Health Insurance

Anything that would ordinarily be paid by your employer is probably allowable as tax-deductible, including health insurance payments.

So, you can use the self-employment health insurance tax deduction to exclude the cost of your health insurance or HMO premiums from your taxable income if your spouse’s insurance plan does not cover you.

Phone and Internet

Your use of the internet and a phone may be necessary for your job, depending on what you perform. Depending on how much of those services are used for business, you can deduct a percentage of the charges.

Travel or Meals

You can deduct all of your hotel and travel expenses if you travel only for business purposes.

Vehicle

You can deduct associated expenses by how your car is used if you use it for work-related travel outside getting to and from a workplace. So, you may track every expense related to your automobile and subtract the percentage that qualifies provided you keep meticulous records.

The IRS’s standard mileage rates can be used to calculate your vehicle expenses more easily by adding up all the miles you travel for work.

Interest

Even if you don’t have a home office, you can still deduct interest on loans. Including your mortgage, even though many loans principals cannot.

Education According to the IRS, job-related continuing education is a regular and essential component. You can deduct any money you spend on education as long as it’s related to furthering your education or staying current with industry advancements.

This also includes any subscription costs or association dues you may have.

Insurance

Do you possess a separate insurance plan that addresses a need about your place of employment? If so, you may also deduct the premiums from your taxes.

Office Operations

If you have a separate office from your home, you can deduct the rent and utilities as business expenditures. You can also cut out any additional expenses for the upkeep of your business.

Whether you have a separate office or not, you can write off the cost of office supplies, software, or technology that is only utilized for your company, as well as the majority of labor-related expenses.

Startup Expenses

Additionally, the IRS permits beginning expenses to be deducted for new enterprises. This covers a variety of one-time costs related to setting up your workspace and developing your business infrastructure.

Taxes for Self-Employment Made Simple with Your Part Time Accountant

There are numerous ways to reduce your tax liability, and we strongly advise you to take advantage of each one that applies to you. Sadly, few independent contractors have the time or knowledge to claim the savings they are due.

If that is you, working with the experts at Your Part Time Accountant is your best bet for saving money and avoiding fines. So that you can concentrate on growth, we’ll do things like compute your quarterly estimated taxes and offer financial advice.