Self-employment taxes explained

Who qualifies as self-employed?

Currently, there are over 40 million self-employed workers. By some estimates, it's more common than it's ever been in the past, and that's not just due to employment changes brought on by the 2020 pandemic COVID 19. The IRS has a formal, complicated description, but basically, if you don't have someone telling you when and how to work and you're paid for the job or product rather than for your time, you're likely considered self-employed instead of being an employee, at least in the eyes of the IRS. That includes if you're part-time, self-employed, or do work on the side for example, even with another full-time or part-time job somewhere else. You might not know it, but you get to take advantage of a number of self-employment tax deductions and benefits that employees don't generally get.

How can I reduce my self-employment taxes?

There seem like a million rules that apply to the self-employed, many of which are really fabulous rules that help small business owners jump start their businesses. But unless you're a Tax Pro, you might not know them all, and might be paying too much in taxes, draining your business of much-needed profits. Here are some of the most common credits and write-offs.

Common self-employment benefits

• Qualified Business Income Deduction (QBID). This is relatively new, and it's one of the biggest deductions. This one allows self-employed taxpayers to deduct up to 20% of their QBI before income taxes are even determined.
• 50% of your self-employment tax deduction. This one allows taxpayers to take an above-the-line deduction of 50% of whatever they pay in self-employment tax.
• Home office expenses. Only self-employed taxpayers can actually deduct their business use of home expenses. There are many smaller deductions like insurance, phone bills, supplies, or gifts not to be missed, as they're all deductions.

All these things have one important point in common: They reduce your taxable income and taxes and allow you to keep more of your money.

How much do I put aside for taxes as a self-employed worker to avoid liabilities and penalties?

The tax laws require us to pay taxes as we make income in one of two ways. Through withholdings that come out of your paycheck like employees do, or through estimated tax payments, which self-employed people do on designated quarterly estimated tax due dates. On April 15, taxpayers simply true up (settle) with the IRS by filing their tax return and paying any balance due, or getting a refund from the IRS.

But whether you're an employee or self-employed, you need to pay taxes as you earn your income. Being self-employed, you'll generally do this by making estimated tax payments.

Calculating your quarterly estimated taxes

Step 1: Estimate your total taxes using your estimated income and after your deductions and credits for the year.

Step 2: Divide the estimated total tax into 4 quarterly tax payments and pay them throughout the year. The IRS has designated dates for this, usually by the 15th day after the last business day of the quarter.

Beware of underpaying your estimated taxes. You may have to pay a penalty if you do it wrong. Self-employment is great for extra income, and now you know it’s great for your taxes, too. Just be sure to keep good records and work with a Tax Pro to make sure you don't miss out on valuable credits and deductions. It can help you and help your business grow faster.

About the Author

Mark Steber is Senior Vice President and Chief Tax Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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