As a freelancer or small business owner, you need to account for self-employed taxes in your monthly budget. Tax software like TurboTax Self-Employed is built to help freelancers do just that.

This is a sponsored post written by Money Under 30 for TurboTax

If you’ve ever earned a salary as an employee, you will know that your paycheck is lower than your agreed-upon salary. This reduction is due to your employer withholding income tax from your paycheck and paying the IRS on your behalf.

However, as a self-employed individual, you don’t have an employer who withholds taxes from your self-employment income. Instead, you must file an annual income tax return and then pay estimated taxes quarterly.

Calculating your tax obligation can be challenging, especially if you don’t know what your freelancing business income for the year will be.

This guide takes an in-depth look at your self-employment tax obligation and how much you should budget for your quarterly payments.

When should you pay taxes when you are self-employed?

Knowing when to make estimated tax payments is crucial when planning your budget. According to the Internal Revenue Service (IRS), you must file quarterly estimated taxes if you expect that you will owe at least $1,000 for the year when you file your federal income tax or if you owed tax in the previous year.

You must generally pay at least 90% of taxes throughout the year via withholdings, estimated or additional tax payments, or a combination of the two. If you do not, it is possible that you may owe an estimated tax penalty when you file your tax return.

The 2022 due dates for the four estimated tax payments are:

  • April 18, 2023
  • June 15, 2023
  • September 15, 2023
  • January 16, 2024

You can pay estimated taxes more frequently if you want. For example, most self-employed individuals prefer making 12 smaller payments rather than four large payments.

Failing to pay quarterly taxes on time or underpaying your estimated taxes can result in penalties, depending on your net earnings from self-employment and your obligation for the previous year. However, the IRS will not impose tax penalties if:

  • Your quarterly payments equal your tax liability for the previous year.
  • Your payments cover at least 90% of your tax obligation for the current year.
  • Your tax obligation is less than $1,000 after subtracting your credits and withholdings.

In addition to making your quarterly payments, you must file your annual federal tax return on Tax Day — April 18, 2023, this year. After filing your local, state, and federal income tax returns, you need to determine whether you still owe taxes or if you are entitled to a tax refund.

Self-employment tax calculation: social security and medicare taxes

Suppose you are a self-employed person, such as a freelancer, independent contractor, sole proprietor, or member of a partnership. In that case, you must pay self-employment tax in addition to income taxes if your net income is $400 or more.

Self-employment tax is the Social Security and Medicare tax for self-employed people. This FICA tax is the same as the Social Security and Medicare taxes withheld from employees’ wages. The term “self-employment tax” only refers to Social Security tax and Medicare tax, and it doesn’t include federal income taxes or any other form of tax.

An employer and employee each contribute to the Medicare and Social Security tax obligation in an employment situation. However, independent contractors and other self-employed individuals have a sole obligation to pay self-employment tax.

The self-employment tax rate is 15.3% as of 2023. For the 2022 tax year, 12.4% of this goes to Social Security and 2.9% to Medicare. But you’ll only need to pay Social Security tax portion on up to $160,200 in income for 2023 or $147,00 for 2022.

Half of your self-employment tax is a deductible expense when calculating your adjusted gross income. Don’t worry about knowing about tax forms or how to figure out your self-employment taxes (social security and medicare), TurboTax Self-Employed will automatically calculate your self-employment taxes based on your net self-employment income and will also give you the deduction for half of your self-employment taxes further lowering your taxable income.

When planning your budget, it may be helpful to assign 20% to 30% of your taxable income to income and self-employment taxes. We recommend setting this money aside in a separate checking account.

How to estimate your taxable income

The first step in determining how much you should budget for self-employed taxes is estimating your tax obligation. You don’t need to pay taxes on all your earnings from self-employment, as you can claim expenses directly related to your business which can lower your net income and in turn your taxes. 

Tax deductions are necessary business expenses directly related to your business activities. Your net earnings from self-employment are your self-employed income minus business expenses, interest, and taxes. The sections below discuss some of the expenses you can deduct from your self-employed income to calculate your tax obligation.

Check out this free Self-Employed Tax Deductions Interactive Calculator that will help you uncover self-employed deductions related to your specific industry that can lower your taxable income.

Self-employment tax deduction

As a freelancer, you need to pay self-employment tax at a self-employment tax rate of 15.3%, which includes 7.65% that would be paid if you had an employer. Although you have to pay the entire 15.3% when you are self-employed, you can deduct half of your self-employment taxes on your personal taxes as an adjustment to income, which will reduce your taxable income.

Home office deduction

The home office deduction is the cost of the workspace you use exclusively and regularly for your self-employed business. You are able to deduct a portion of your home expenses like rent, mortgage interest, utilities, or homeowners’ insurance based on the portion of your home used for your home office.

Marketing deduction

The cost of marketing and advertising to promote your services and onboard new clients can be deductible expenses.

Travel and mileage deduction

The 2023 mileage rate for business use is 65.5 cents per mile. In 2022, the standard mileage rate was increased for the second half of the year. For January through June, it was 58.5 cents per mile. And for July through December, it was 62.5 cents per mile.

That means for every mile you drive for business purposes, you may be able to up to 65.5 cents per mile for expenses related to your car and driving. You can also deduct other travel expenses, such as air travel and accommodations, for business trips.

Health insurance premiums deduction

As a self-employed freelancer, you may be eligible to list health insurance premiums as a tax-deductible expense when you file self-employed taxes. However, this deduction may not exceed your annual net earnings from self-employment.

Read more: How do you get health insurance when you’re self-employed?

Hardware and software deduction

The cost of hardware and software you use to serve clients can be tax-deductible expenses. Examples of these include the costs of your work computer, editing software, and hard disc drives.

Retirement contribution deduction

Your contributions to an Individual Retirement Account (IRA) might be tax-deductible. While Roth IRA contributions are not deductible, when you have reached age 59½ or retirement, your withdrawals are tax-free.

Education tax benefits

As a freelancer, you may want to sign up for courses or complete certifications to improve your service quality. Tuition and the cost of continuing education expenses related to your business may be worth a tax credit.

Read more: Tax benefits for students: how to pay less and get more back

Membership and license fee deductions

If you are a member of trade associations, a state board, or other organizations, such as the Chamber of Commerce, your membership fees can be possible deductions. Licensing fees might also be eligible for deduction.

Office supplies deduction

You can deduct the cost of office supplies, provided that they meet the IRS’s requirement of being “ordinary and necessary” to your business. Examples of these items include stationery and printer ink cartridges.

Startup cost deduction

Under IRS rules, you may be eligible to deduct up to $5,000 of your new business’s startup costs. This deduction includes the costs related to creating your active business or trade. The cost of investigating the acquisition or creation of an active business might also fall under the startup cost category.

Interest deduction

Interest on a business loan, credit card, or line of credit is deductible, provided that you use the financial product or loan solely to pay for business expenses.

Online tools deduction

The costs of online tools you use to provide your freelancing services can be deductible expenses. Some examples of these expenses can include website hosting fees and subscriptions for online software you use in your business.

Contract service deduction

When using the services of another contractor or freelancer to market your own business or serve clients, you can include their fees as part of your business-related expenses. These services include web design, logo creation, and blog writing.

Transaction fee deduction

Transaction fees you incur when receiving or making payments via third-party payment processors are tax-deductible.

Phone and internet deduction

The business portion of your home’s phone and internet usage are tax-deductible. Most tax professionals should be able to help you calculate the amount you can subtract as a business expense.

Personal finance tracking

Estimating your net earnings, deductible expenses, and self-employed taxes may seem challenging if you are new to freelancing, but if you track your business income and expenses regularly and keep all receipts as proof of your deductible expenses, doing your self-employed taxes will not be as bad as you think. Plus, TurboTax Self-Employed guides you through your self-employed taxes and searches industry-specific deductions, uncovering deductions you may not even know you are eligible for. You can also connect to a TurboTax Live Self-Employed tax expert to get help along the way or you can fully hand off your taxes to a TurboTax Live Self-Employed tax expert experienced in self-employed taxes.

It may be a good idea to conservatively estimate your net earnings and tax deductions to avoid a substantial tax bill in April. If the self-employed taxes you paid exceed your obligation, you might be entitled to a tax refund.

Making provisions for taxes

Saving for taxes as you earn is ideal if you earn an inconsistent income as a freelancer. Open a designated savings account, then put a percentage of your income into this account whenever you receive a payment. Automating this process can ensure that you don’t need to take money from your personal savings on Tax Day.

You also have the option to pay 25% to 30% of your income into this savings account at the end of every month. This strategy can be ideal if you only make one monthly payment from your business account to your personal account.

If you have been freelancing for several years and can accurately estimate your income, calculate around 30% of this amount, divide it by four, to help give an idea of the tax payment you can make for each quarter.

Read more: How to separate your personal and business finances (and why you need to)

Filing your income tax return

As a freelancer, you must file your personal tax return and Schedule C as a sole proprietor provided that your net earnings from self-employment were $400 or more for the year. When completing your Schedule C, it will account for your income and deductible expenses, to calculate your tax obligation related to your business.

The self-employment net earnings calculated using Schedule C will be used on Schedule SE (Self-Employment Tax) to calculate the tax you need to have paid throughout the financial year. If the self-employed tax paid during the year is less than your obligation, you’ll likely owe the remaining balance.

Don’t worry about knowing how to calculate your self-employed taxes and what forms need to be filled out.  TurboTax Self-Employed automatically calculates your taxes based on your entries and puts everything on the correct tax forms.

A qualified joint venture with membership only consisting of a married couple filing a joint return can choose that the IRS does not treat it as a partnership for federal tax purposes. 

File taxes responsibly

Self-employment tax is a measure to ensure that freelancers and other business owners make the same tax contributions as employees who receive traditional W-2 wages.

Proper tax preparation is critical to ensure your tax compliance as a freelancer. If you are new to freelancing, the 15.3% tax rate might be a bitter pill to swallow, but tax deductions can help reduce your obligation.

As a freelancer, you don’t have an employer to withhold and pay your contributions from your income, and your tax compliance is your responsibility. However, doing the calculations and learning the forms and relevant tax regulations doesn’t have to be overwhelming.

While most freelancers are apprehensive about seeking professional tax advice or using the right support tax tools to minimize their tax-related expenses, including tax preparation fees, the help of a professional or professional software could help you save in the long run.

In reality, the benefits of seeking the proper tax preparation support far outweigh the costs. Using the services of a tax expert can reduce your tax obligation and help you avoid potential costly penalties.

Read more: Should I hire a tax preparer?

File with TurboTax

With TurboTax Live Self-Employed, you can get expert advice from real tax professionals at any time. You can also ask a tax expert to review your return before filing. TurboTax Live Self-Employed is also available in English and Spanish year-round.

Or, if you just don’t want any part in doing your own taxes, you can use TurboTax Live Full Service Self-Employed. This service matches you with your own dedicated tax expert experienced in self-employed taxes that’ll do your taxes for you, from start to finish.

TurboTax Self-Employed is the leading online tax preparation software for freelancers. Using this solution, you can uncover deductions specific to your industry. TurboTax will ask you questions about your business and life, then help you file your self-employed taxes.

The software will search hundreds of possible deductions, which means you won’t pay more taxes than is necessary. With the 1099-NEC snap and autofill feature from TurboTax, you can take a photo of your 1099-NEC and the information will automatically import into the correct forms, saving you valuable time.

Using TurboTax is straightforward, even if you have never filed a tax return before. Using this product, you can get a personalized audit assessment and one-on-one assistance whenever you need it.

Ensure that you are fully tax compliant and get a maximum tax refund. Sign up for TurboTax Self-Employed today and pay only when you file.

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