In spring 2023 I did some volunteering with Common Wealth Charlotte‘s amazing VITA Latino program, which offers free tax prep services to Charlotte’s Latino community. (I wanted to do it again in spring 2024, but grad school ate my life; I’ll be back for 2025!) The IRS partners with community organizations to provide free training through the Volunteer Income Tax Assistant (VITA) program, which (along with the TCE program, or Tax Counseling for the Elderly) provides assistance with basic tax prep for individuals who earn less than $64k, who have disabilities, who speak limited English, or who are over age 60.

After studying and passing several tests, I became qualified to assist people with preparing their taxes within a limited scope; the volunteers were all exceptionally smart and generous humans, and the program involves robust quality review. If you (or someone you know) need tax assistance and fit the qualifications for VITA/TCE, you should look for a site in your area.

While volunteering, self-employment tax came up a lot. I hadn’t encountered it at all before I became an entrepreneur, and seeing dozens of different taxpayers’ situations made me realize that we should all know at least a little about it.

Who owes self-employment tax?

Self-employment tax is paid by people who received net earnings while not legally classified as an employee. If you are a freelancer or an independent contractor (including as a gig worker) and you earned more than $600, you likely received a form 1099-NEC to tell you how much you earned. (This used to be a 1099-MISC but changed to the 1099-NEC in 2020.) If you have a small business/partnership, or do independent work where you’re paid directly by a client or customer, you may not have received any forms and you’re reporting this yourself.

Major P2P processors (Venmo, Square, etc.) have been stuck in limbo about issuing forms to people who have received payments through their apps. You can read more about the drama here, but the punch line is that you are still legally supposed to report all self-employment income, even if you didn’t get a form and even if it wasn’t categorized as a “business” payment.

If you receive a 1099-NEC or are reporting self-employment income, there is a good chance that you will owe both federal and state income tax AND self-employment tax on that income. Whether that means you actually have to pay money to Uncle Sam at tax time depends on the rest of your household’s tax picture. (More on that in a minute.)

This post would be even longer if we talked about all the nuances of worker classification (and whether it’s a less-than-ethical way for some employers to keep costs down and dodge their responsibilities to workers…). For now, this is a practical post, so we’re going to focus on what you need to know if you find yourself holding a 1099-NEC or reporting your self-employment income at tax time.

What even IS self-employment tax, and why does it feel worse than regular tax?

Self-employment tax is simply contributions to Social Security and Medicare, which all wage-earners owe — even people who ultimately have zero “taxable income” per their tax return. W-2 employees usually have a little bit withheld from every paycheck to cover these contributions. Individuals who receive 1099-NECs for gig/contract work typically do not have much (if any) tax withheld at all, and self-employed people have to do the withholding themselves.

In practice, the difference looks like this:

• If you’re an employee, your employer withholds taxes on your behalf from every paycheck and they send it directly to the IRS throughout the year. You almost never have to think about it.
  • Per the IRS, “The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.” In other words, if you are considered an employee, your employer covers 7.65%, and you cover 7.65%.
  • Your employer also withholds the amount of federal/state income tax that you requested on your W-4.
    P.S. If you owed more than $1000, received an unusually huge refund, or your household experienced major changes in employment, marital status, family size, or homeownership, it’s worth revisiting your W-4 and adjusting your 2024 withholdings.
• If you’re a 1099-NEC worker, the company who pays you is not withholding and sending in your Social Security and Medicare taxes (or paying half of them). If you’re a newly self-employed person, you may not be doing that yet for yourself.
  • You must pay both the employer and the employee halves of the social security and Medicare tax, for a total rate of 15.3%. When filing your tax return, if your expected refund of income taxes (plus certain special credits) is less than whatever 15.3% of your self-employed income is, you will owe.
  • You must also pay federal/state income tax on your net earnings. Although it is possible for federal/state taxes to be withheld as a 1099-NEC employee, it’s not especially common. (This is important to remember if your self-employment income is your only source of income, because you haven’t paid anything that might get refunded back to you.)
  • If you owe more than $1000 when you file your return, the IRS may also hit you with an underpayment penalty, so it’s ideal to set aside money every month and make quarterly estimated payments directly to the IRS (more on that at the end).

The mathematical reason that it feels worse is that you are paying that extra 7.65%. The psychological reason is that you experience this taxation on a delay that makes it feel like a big loss, instead of never seeing it and having it gradually skimmed out of your paycheck all year long. This can cause an especially unpleasant shock the first year you earn self-employment income. But there are strategies to help with both issues!

Minimizing the burden: track your expenses and pay for smart professional help

Self-employment tax feels like a major bummer the first time it hits. (You get to claim a tax deduction for the employer half of the tax, at least?) But there are a couple of things you can do to make it hurt less.

Track all your business/self-employment expenses. If there are things you use exclusively in operating your business (a computer that you buy, or a service you subscribe to just for business use), in the course of doing business (the miles that a DoorDasher puts on their car), or to support the space where you work (utilities that you pay for your office), those are all deductible expenses. Save paper or digital copies of everything you spend that might be considered a business expense.

Self-employed people may also be able to deduct business travel, some business meals, costs associated with an in-home office, uniforms, supplies that you purchased for the work you did, professional development and professional organization fees, advertising (including branded swag and promotional events), and webpage costs; look here for more information. (Sadly, the 2017 TCJA wiped out deductions for most types of regular employees.)

• Gig workers: look at mileage/vehicle expenses, as well as any equipment and services used for your business (more details here)
• Creatives: look at office expenses, travel, marketing, and professional fees and dues (more details here)
• Realtors who are paid on a 1099 basis: look at marketing, education, licensing, dues, lots of mileage and travel, and client care costs (more details here)

As tempting as it can be to take your best guess, if the tax man decides to audit you, you’re going to need to show receipts. Before any tax preparation appointment (or before doing it yourself), spend some quality time collecting information around every possible eligible dollar you spent that could count as a deduction; organize them in whatever fashion makes the most sense to you before you start ruling things out. Keep your receipts for at least 3 years after you file. Because these deductions are so useful, it’s extremely important to make sure you do it correctly and avoid anything that the kids might call “sus,” which brings me to my next point…

Consider paying for professional help. There is a really good chance you are going to miss something the first few times you do this, or try to claim something that doesn’t really count. The IRS is the final word on what’s legitimate, but their website isn’t the most user-friendly guide to this process, and if you DIY it with bad advice from a random finfluencer, you may wind up in hot water. Instead, pay for help.

• A good CPA/Enrolled Agent (EA) is worth WAY more than what you pay them because they should know these weird and ever-changing laws inside and out. Tax pros can help you identify strategies for improvement so you’re not just solid for this year, but set up wisely for future tax years too. CPAs and EAs can also represent you to the IRS in the event that you are audited.
• Bookkeepers provide excellent ongoing support with tracking and managing expenses, filing the right forms, and staying on top of your quarterly estimated tax payments. If you’ve thought of hiring a bookkeeper or getting some training on better managing your own books, I highly recommend checking out my friend IQ Bookkeeping’s excellent newsletter and resources.
• As a small business owner/self-employed person, you are eligible to deduct tax preparation and bookkeeping fees as an ordinary/necessary business expense, which means this is also a totally legit way to lower your tax burden!

Why even self-report your self-employment income?

So, there’s the whole “it’s the law and therefore the right (or at least smart) thing to do” justification, but I hear you if you feel like it’s no big deal to keep a little under-the-table cash a secret from Uncle Sam. However, there are several practical reasons to consider reporting your self-employment income, even if it’s just something you’re earning on the side.

• Paying into SSA and Medicare gives you access to those benefits at a higher level in your retirement years. This might be the furthest thing from your mind now, but after you cross the retirement threshold, your future self will be really grateful to you.
• If you want to borrow money as a partly or totally self-employed person, your tax return is an important way to prove your income history to a lender. W-2 employees can show pay stubs and salary verification letters to lenders, but self-employed individuals show their successful history through at least two years of tax records.
  • If you’re self-employed and reducing your earnings through legitimate and smart business expense deductions, your income might already look like it’s on the low side relative to your actual standard of living. Reporting all your income is one of several smart things you can do to set yourself up for success if you wish to obtain a mortgage or other loan product.
  • More ideas here to help you succeed as a self-employed mortgage hopeful: I especially love how much having a really juicy emergency fund and minimizing your debt burden can be extra powerful for a self-employed borrower.
• Reporting your income allows you to save in tax-advantaged retirement accounts. There are some neat retirement savings options available for self-employed people who are in a financial position to save enthusiastically for retirement.
  • A Roth or Traditional IRA is easiest to set up. Yes, it’s available to everyone, but your household must have earned income to contribute… which means that if you aren’t reporting your income, you can’t contribute.
  • The Simplified Employee Pension (SEP or SEP-IRA) and solo 401(k) plans are solid options if your business is just you, or you and your spouse; the amount you can contribute is pegged to your net earnings as reported to the IRS. This means that the more income you’re reporting and paying taxes on, the more you can contribute (up to a threshold).

When and how to set up estimated tax payments

According to the IRS, “Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.”

Reversing the math just for self-employment tax: if you are on track for more than $6,667 in net business income, you probably need to set up estimated payments. (The number is even smaller — more like $4-5k — if we count your likely federal tax liability.)

• If you expect to earn less than that, or if you are a new business-owner/self-employed worker and you had NO tax liability for all of the previous tax year (in other words, your total tax was zero or you didn’t have to file a tax return), you do not have to pay estimated tax payments.
• If you (or someone else in your tax household) will earn W-2 income and you don’t want to fuss with making extra payments, it is perfectly ok to increase W-4 withholdings to cover the total tax picture.
• Even if you are off the hook for making estimated payments for tax year 2024, it’s still smart to start setting aside at least 15.3% of your net profits, plus about 10% for federal tax (or whatever amount is appropriate for your household’s effective tax rate). If you do owe, you’ll have the funds to cover the bill, and if you don’t owe, that money turns into a self-paid tax refund. For good financial hygiene, put set-aside taxes in a separate account that is not used for other business purposes. (I highly recommend putting it in a High Yield Savings Account!)

How to calculate estimated payments

The form 1040-ES will help you calculate “tax on income that is not subject to withholding, such as self-employment income (also interest, dividends, rents, alimony, etc.).” The form contains pretty detailed instructions to calculate your estimated total tax payments: expected adjusted gross income, deductions, tax credits, and self-employment tax.

If your worksheet shows that you are, in fact, likely to owe less than $1000, you don’t have to pay; if you look like you’ll owe more than that, you divide the amount by four and start scheduling your estimated tax payments.

If your situation changes as the year goes on — for example, you have to pay a massive expense that lowers your expected earnings, or your summer sales at the maker’s market are better than your wildest dreams — you are expected to update your estimated payments by recalculating your next quarterly payment. You can get a refund of overpaid self-employment tax when you file your income taxes, but underpaying can lead to penalties, so it’s best to try and update as you go.

How to make your estimated payments

The IRS Payments page is your one-stop shop for making payments. For estimated tax payments, you can use Direct Pay, the IRS’s free secure payment scheduling service. This is what my accountant recommended to pay our small balance due for 2022, and it was really easy. Setting up payment for this year required me to remember some basic data from the 2021 tax return, plus bank routing and account info, and it took me less than three minutes. I also did a test run for estimated payments, and they were even simpler.

You can schedule payments up to a year in advance, and you can modify or cancel your payment until 11:45pm ET two business days before the scheduled payment using the confirmation number that they email you when you schedule it.