Self-employment tax pitfalls


It's true that if you're self-employed, you don't have a boss constantly looming over your shoulder to make sure you're not on Facebook on company time, but you will be dealing with a whole different set of rules. And these taxation rules, which can be difficult to understand, hold some serious consequences if not followed properly.


Who is self-employed? Per irs.gov, someone who meets any of the following criteria is considered to be self-employed:

  • You carry on a trade or business as a sole proprietor or an independent contractor;
  • You are a member of a partnership that carries on a trade or business; or
  • You are otherwise in business for yourself (including a part-time business).


If any of these describe you, then you are required to file an annual return and pay estimated tax on a quarterly basis, using form 1040/1041 ES. Quarterly payments have deadlines on the 15th day of April, June, September, and the following January.

The horrible surprise of "self-employment" taxes.

For those who are self-employed — or are thinking about making the shift — did you know that you have to pay a tax for the privilege of earning a living? We aren't just talking about the income tax. Rather, the tax on working for a living is both social security and Medicare taxes bundled up and served as a brand new creation – the self-employment tax. When you are an employee, you are paying half these taxes (go ahead and check your paychecks and you'll see withholdings for social security and Medicare). However, when you become self-employed, you have to pay for both your half and the half that your employer would normally be responsible for.


Self-employment tax is broken down as follows:

  • The self-employment tax rate is 15.3% on your first $118,500 of net income, then 2.9% on net income beyond that:
    • 12.4% for Social Security
    • 2.9% for Medicare
    • .09% for the Affordable Care Act – it may apply, but is not universal


Penalties for not making estimated tax payments, including your self-employment taxes

  • If you don’t pay enough you may be charged a penalty;
  • If you don’t pay enough by the due date of each payment period, you may be charged a penalty (even if you’re due a refund when you file your tax return!);
  • Special rules for farmers and fishermen (we love those fishers and farmers!);
  • 4-5% annualized penalty (calculated on exact number of days underpayment is late; please note that usually, the total penalty does not exceed 3% of total underpayment); and
  • Penalty abatement may apply.


This is why the self-employed really sort of hate the IRS

When you are an employee, there is always someone making sure you are following your tax obligations by submitting withholdings on your behalf. Everything changes when you are self-employed (or become an employer). Now, you become responsible for everything. The consequences can be severe, and our education system still teaches our citizens absolutely nothing about the horrors of getting things wrong with the IRS. Unfortunately, many self-employed taxpayers have to learn these lessons in a very hard, yet completely avoidable, way.


If you are new to self-employment — or have found yourself in trouble with the IRS due to not understanding how your self-employment taxes work — don't hesitate to reach out for help. Quarterly payments, self-employment tax (not to mention what is available for deduction), and what clearly defines a self-employed individual can all be confusing topics and can quickly make you feel overwhelmed. Self-employment can be one of the most rewarding experiences in the world, but only if it's not being constantly derailed by the IRS.


If you would like to speak to us to see if we can assist you, contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com.