How to Pay Self-employment Tax
Here's a little-understood fact about the United States tax system. While most of us think of April 15 as Tax Day, the government is actually collecting income tax and other taxes year-round. That's how it keeps government programs funded and makes interest payments on the national debt.
If you work for someone else, your employer withholds income taxes and employment taxes — another name for Social Security and Medicare contributions — from each paycheck and deposits the funds in Federal Reserve banks. If you're self-employed, you also have to pay taxes year-round in the form of estimated taxes.
Estimated taxes consist of three parts:
- Federal income tax
- State income tax (unless you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming)
- Self-employment tax
For the purposes of this article, we're going to focus on the self-employment tax portion of estimated taxes. When you file your federal tax return in April, you will be instructed to calculate your estimated self-employment tax for the next tax year. Basically it's an educated guess based on what you earned this year and whether you expect your earnings to grow or shrink in the upcoming year.
Follow the instructions on IRS form 1040-ES: Estimated Tax for Individuals to calculate your estimated tax payments for the coming year. The process is almost identical to the one used for calculating this year's self-employment tax, except the amount due is divided into four equal payments. Estimated taxes are due quarterly.
The estimated tax due dates for 2015 are:
- Jan. 15, 2015 (for fourth quarter, 2014)
- April 15, 2015
- June 15, 2015
- Sept. 15, 2015
Estimated taxes must be paid by April 15 for January through March, by June 15 for the second quarter of the year, by September 15 for the third quarter and by January 15 for the fourth quarter, in order to avoid penalties The fourth quarter deadline is extended to February 2 for people who file a year-end tax return and pay the entire balance due at the same time [sources: Bell, Yale].
If your total estimated self-employment tax for the upcoming year is less than $1,000, you don't have to pay estimated taxes. But if you owe more than that amount and you fail to make estimated payments, you will be penalized a small percentage (3 percent in 2014) of the amount unpaid each quarter [source: Fitzpatrick].
You can pay estimated online using a credit card or direct bank account transfer through IRS E-Pay. If you prepare your income taxes using tax preparation software, the program will automatically generate four estimated tax vouchers that you can mail in with your estimated tax payment each quarter. There are different mailing addresses for each state, so check out the instructions for Form 1040 SE for the location nearest you.
For lots more information about taxes and self-employment tips, check out the related HowStuffWorks articles below.
Author's Note: How the Self-employment Tax Works
As a freelance writer, I am all too familiar with the self-employment tax. I wasn't always so savvy, though. I clearly remember the first year I broke out on my own, so excited to be getting paid directly for my work, but completely unaware that no one was withholding income or FICA taxes from my paychecks. Boy did I get an unwelcome surprise when April rolled around! We owed a big chunk of change in federal and state taxes, plus the dreaded self-employment tax. We've been paying estimated taxes ever since, so now we feel the pain year-round, just like everybody else.
- Fitzpatrick, Diana. "How to Avoid Estimated Tax Penalties." Nolo (Dec. 5, 2014) http://www.nolo.com/legal-encyclopedia/estimated-tax-penalities-how-avoid-underpaying.html
- Fox, Justin. "Where are All the Self-Employed Workers?" Harvard Business Review. Feb. 7, 2014 (Dec. 5, 2014) https://hbr.org/2014/02/where-are-all-the-self-employed-workers/
- IRS. "Self-Employed Individuals Tax Center." (Dec. 5, 2014) http://www.irs.gov/Individuals/Self-Employed
- IRS. "Self-Employment Tax (Social Security and Medicare)" (Dec. 5, 2014) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employment-Tax-Social-Security-and-Medicare-Taxes
- Social Security Administration. "Benefits Planner: How Credits are Earned" (Dec. 5, 2014) http://www.socialsecurity.gov/retire2/credits1.htm
- Upper New York Annual Conference of the United Methodist Church. "Special Clergy Tax Rules" (Dec. 5, 2014) http://www.unyumc.org/pages/detail/1397