If you're new to the self-employment game, you may be surprised to discover that your tax bill at the end of the year is higher than it is if you're an employee. That's because when you work for yourself, you're required to pay a self-employment tax toward Medicare and Social Security in addition to paying other applicable state and federal taxes. In effect, you pay both the employee and employer portions.
It's best to set aside funds throughout the year for the SE tax to avoid getting stung at tax time. Timely and accurate payment of the SE tax will help you maximize the Social Security benefits you can receive later in life. You're required to pay SE tax if:
Calculate your SE taxes
The amount you pay in SE taxes is based on the amount you receive from your self-employment activities, minus any allowable expenses you incurred while earning that income.
I recommend: Use the
self-employment tax estimator calculator from H&R Block to determine your SE taxes.
Get help from accounting software
Avoid costly mistakes from miscalculations by using software that automatically calculates your SE taxes for you.
I recommend: Popular tax-preparation programs, such as
TaxAct, TurboTax,
eSmartTax and
TaxCut from H&R Block, can calculate your SE taxes and complete your Schedule SE.
Use the proper forms to report your SE taxes
To report your SE taxes, you'll need to file Schedule C of Form 1040, on which you report your net profit or loss, and Schedule SE, on which you calculate your SE tax.
I recommend: Download IRS Form 1040
Schedule C and
Schedule SE.
Take your deductions
You can deduct half of your SE tax when figuring your adjusted gross income.
I recommend: Enter one-half of your SE tax on Line 29 of
Form 1040, which you can download from the IRS Web site.
Make sure the parties you worked for accurately reported your compensation
Employers are obligated to report to the IRS any payments to you above a set minimum. Companies will also send you a copy of the Form 1099 they sent to the IRS. Compare the information on the 1099 with your own records to insure the company correctly reported the amount they paid you.
I recommend: If you notice a mistake, ask your client to file a
Form 1099 Correction, which can be done using a number of accounting and payroll software and online services that are listed on the IRS Web site.
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