Understanding your tax obligations
Self-employment taxes can feel daunting. An understanding of the rules and support from M&T can set your small business up for success.
What is self-employment tax?
If you work for yourself, say, as a small business owner, freelancer or independent contractor, you’re required to pay a federal self-employment tax of 15.3% on net earnings of $400 or more per year. Additional state tax may be due and will vary by state. That federal rate consists of 12.4% for Social Security and 2.9% for Medicare. It’s like the Social Security and Medicare taxes withheld from the pay of a wage earner in a traditional employer-employee arrangement. For 2022, the first $147,000 of your earnings are subject to the Social Security portion of self-employment tax. You can deduct half of your self-employment tax when calculating your adjusted gross income.
How to pay self-employment tax
When you work for someone, that employer withholds taxes from your paychecks throughout the year. But when you’re self-employed, you’ll need to make quarterly estimated tax payments if you anticipate owing at least $1,000 in taxes. At the beginning of the year, you’ll estimate what you expect to owe for the year. You’ll then send a fourth of that amount to the IRS each quarter using IRS Form 1040-ES. If you’d prefer, you can send smaller payments more frequently. If you fail to pay estimates at least quarterly, you could incur late-payment penalties.
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