5 Steps for Calculating & Filing the Self-Employment Tax.

By Ashley Beaudoin – Treasury Management Analyst

Unlike W2 employees who work for an organization and have their taxes automatically deducted from their paychecks – if you have your own business, do freelance work or operate as an independent contractor – you’ll take the reins when it comes to filing the self-employment tax, also known as the Self-Employment Contributions Act tax (or “SECA tax”). Sound complicated? It’s easier than one might think!

Here’s the gist: You’ll report on IRS Form 1040 how much your business earned and subtract any expenses from that total. From there, you can calculate the tax amount owed and pay it. If you end up with a profit of $400 or more, you’ll need to count it as income. And in the event you experience a net loss, you can deduct it to a limited amount. Fairly straightforward, right? Let’s explore more.

What Is the Self-Employment Tax?

When tax season rolls around, business owners not only pay income tax but the self-employment tax. And when the bill comes due, especially if you’re a first-time entrepreneur, you might do a double-take upon realizing that you’re suddenly paying considerably more than you might have been as an employee working at another business – because you’re no longer sharing the cost of Social Security and Medicare.

Take a deep breath. While keeping track of what you owe and covering your tax obligations may seem daunting at first, remember why you started your own business in the first place. You had a dream and brought it to life. You could have easily given up, but that’s just not your style. You’ve got this! And we’re right by your side to help you better understand the process and provide basic next steps.

1. Calculate what you owe

   When preparing to file the self-employment tax, you first need to calculate how much you owe, and this largely depends on the IRS’ latest applicable figures. While those can change, here’s the basic approach: Multiply your net earnings by the percentage subject to tax (this has typically hovered slightly above 92%), then multiply that number by the percentage allocated for Social Security and Medicare.

   Note: It’s also important to understand any state and local taxes that might apply in your case.

2. See what write-offs you qualify for

   After you’ve calculated how much you owe the IRS, you’ll want to figure out what business expenses qualify for a potential tax deduction. From supplies to advertising to employee compensation, there are many ways you can save by subtracting from your taxable income. Access a full and detailed list of tax write-offs by visiting the IRS’ website!