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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).
The gig economy seems to be the way of the new world. More people than ever are freelancing and earning side income.
After all, isn't that why you're using this calculator? You — and thousands of taxpayers like you — are learning how to navigate 1099 taxes. And that starts with figuring out how much self-employment tax you have to pay.
Self-employment income is just code for “non-W-2.” It can come from running a small business, freelancing, or just working a casual side hustle.
When you work as a standard employee, your employer automatically withholds your income and FICA taxes (Social Security and Medicare) and pays them to the IRS.
Self-employed individuals, on the other hand, have to calculate and pay these taxes themselves.
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As a 1099 earner, you’ll have to deal with self-employment tax, which is basically just how you pay FICA taxes. The combined tax rate is 15.3%.
Normally, the 15.3% rate is split half-and-half between employers and employees. But since independent contractors don’t have separate employers, they’re on the hook for the full amount.
If you’d like more details on why things work this way, check out our beginner’s guide to self-employment tax.
But for now, think of self-employment tax as those double-pop popsicles. It can be split between two people, but it comes in a single package. There’s no way to avoid paying for both sticks even if it’s just you.
Luckily, only your net earnings are subject to self employment taxes. That’s your gross income minus your business write-offs. (More on this later!)
Many freelancers are surprised to learn they have to pay multiple types of taxes on their return. It seems like it should be an either or situation, right?
Self-employed individuals have to pay both income tax and self-employment taxes.
So what’s the difference? In short, your income tax is assessed on your total income for the year, whereas self-employment tax is assessed on your business income for the year.
Your income tax can be reduced through adjustments, standard or itemized deductions, and tax credits.
Your self-employment tax, on the other hand, can only be reduced through business write-offs and tax credits.
If you think you might owe more than $1,000 in federal income taxes, you should be making payments throughout the year — not just when you file your return.
These additional payments are referred to as “quarterly” or “estimated” tax payments. You pay your quarterly taxes on the 15th day following the end of the quarter.
For example, let’s say you expect to owe $2,000 in taxes. You would divide that amount by four and make your quarterly tax payments on the following schedule:
We haven’t gotten into all the nitty-gritty here — like the forms that are involved in the filing process. If you’re interested in more details, check out our blog post on how to pay self-employment taxes step by step.
Now for the fun part — lowering your tax bill! As I mentioned earlier, the only way to effectively reduce self-employment taxes is to lower your net income.
Here are the three best ways to do that:
Most write-offs are missed because people don’t keep track of what they buy for work. In the frenzy to pull everything together before taxes are due, eligible write-offs tend to fall through the cracks.
Do yourself a favor and start keeping up with your expenses now. More of your purchases count as business expenses than you might realize, and they could significantly lower your taxable income. Here are a few examples of business tax deductions you can take:
If you’re wondering where to start with this, you’ve come to the right place. The Keeper Tax app is specifically designed for gig and freelance workers.
The app will find and sort all of your business write-offs automatically. When you’re ready to file, all you have to do is upload your 1099s, and we’ll handle the rest.
This isn’t a feasible option for everyone. (Rideshare or delivery drivers, for example, are locked into a relatively inflexible payment schedule.) But for those of you who invoice clients, consider delaying your December invoicing until the New Year.
Here’s why: A payment you receive on December 31st has to be reported on your tax return by the following April. However, a payment you get on January 1st doesn’t have to be reported until April of the following year. That’s 11 extra months!
Delaying your income by just a couple of days can give you lots of extra breathing room to plan for taxes.
If you know you’re in for a painful tax bill, this strategy could help.
Here’s how it works: rather than waiting till January to pay your regularly scheduled bills, pay them in December instead.
For example, if your business rent is due January 5th, pay it December 30th. This will allow you to claim more deductions in the current tax year — essentially borrowing from next year’s write-offs.
If you’re going to use this strategy, it’s important to look ahead first. Here are some scenarios where prepaying could be a beneficial move and help you save money overall:
You can’t write off an expense that’s more than 12 months away, but this strategy can still give you a bit of much-needed wiggle room during stressful years.
At the end of the day, Keeper Tax has your back. We’re your cheerleader, quarterback, and defensive lineman all rolled into one. Keep using our free tools like this one, and download the app today. Let us help you score a tax refund.