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.


Preparing Taxes

Keeping your financials organized and up-to-date are important parts of starting a business. Consult our resources for insight on how to get prepared. Learn more about Preparing Taxes

Partner with M&T Bank

M&T’s Business Banking Specialists are ready to offer you support at any stage of your business. Get to know the advantages of being an M&T Business Banking client. 

This article is for informational purposes. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.