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Paying Self-Employment Tax: What You Need To Know In 2024
Paying Self-Employment Tax: What You Need To Know In 2024
Every freelancer, independent contractor and small business owner has to deal with self-employed tax at some point. Unlike W-2 workers who have their employer deal with taxes for them, 1099 workers are left to fend for themselves in the tax department.
Being self-employed already comes with a lot of responsibility. You have to find your own clients, set your own hours and manage your finances. Dealing with taxes can also get overwhelming, especially with the IRS laws constantly changing.
So, we’re breaking down everything from the latest self-employment tax rate, important self-employment tax forms, self-employed tax credits and how freelancers can use a self-employment tax calculator to easily calculate their 2024 SE tax.
Table of contents
What is self-employment tax?
Let’s start with the basics. If you work for yourself, you have to pay self-employed tax if you earn over $400 in 1099 income in a year. This threshold applies to net income, so after you write off business expenses.
As we mentioned earlier, when you're employed full-time by a company, the payroll department generally takes care of withholding your income tax. Your employer also deducts Medicare and Social Security taxes, collectively known as FICA (Federal Insurance Contributions Act), from your paycheck.
If you're self-employed, you are responsible for paying the self-employment tax, which includes both Social Security and Medicare taxes. This tax is calculated based on your taxable earnings and covers both the employee and employer portions.
Self-employed individuals have to pay SE tax on top of federal and state income taxes. This makes keeping up with the latest tax law changes essential. Navigating self-employment taxes is a little more tricky as there are new rules and forms to deal with. We’ll talk about that in later sections.
How much is self-employment tax?
The self-employment tax rate for 2024 is still 15.3%, just like it was for 2023. This rate covers both Social Security and Medicare taxes. This is how it breaks down: 12.4% goes to Social Security and 2.9% goes to Medicare.
If you're employed by a company, your employer handles these taxes, splitting the 15.3% between you and the company, with each paying 7.65%. But if you're self-employed, you're on the hook for the full 15.3% yourself.
Keep in mind that the self-employment tax rate only applies to the first $160,200 of your taxable self-employment income in 2023. Anything you earn above that is only subject to the 2.9% Medicare tax. For the 2024 tax year, this cap goes up a bit, and the Social Security portion applies to the first $168,600 of earnings.
You can use a self-employment tax calculator to easily do the math for you. If you want to try to calculate it yourself, remember that self-employed tax only applies to 92.35% of your net earnings.
How to use a self-employed tax calculator in 2024
Using an online calculator is the simplest way to find your self-employed tax liability. FlyFin’s tax calculator only asks you a few basic questions:
- Your filing status
- The state you’re filing in
- Your gross 1099 income
- W-2 income (if you have any)
- Your estimated tax deduction amount
What are the important self-employment tax forms?
Self-employed taxpayers have the same filing deadline as W-2 taxpayers: April 15. This means filing both federal and self-employment tax forms by this day. Missing the deadline can result in late penalties, so make sure to file an extension if you need it.
Something we haven’t mentioned yet is estimated tax payments. Self-employed taxpayers have to make quarterly tax payments to the IRS if they estimate they’ll owe over $1,000 in taxes. The deadlines usually fall on April 15, June 15, September 15 and January 15 of the next year.
A quarterly tax calculator can help figure out your tax liability. You’ll be required to show your workings on Form 1040-ES and save a copy for your records.
Schedule C is a crucial self-employment tax form for small business owners because it's where you report your business deductions, helping you save money. By subtracting these deductions from your gross income, you determine your net profit or loss.
On Line 31, you'll calculate this net profit or loss by deducting your expenses from your income. This figure is essential for calculating your self-employment taxes on Schedule SE. You can actually claim 50% of your SE tax as a tax deduction. Schedule SE will walk you through calculating this deduction and show you exactly where to enter it on Form 1040.
Self-employed taxpayers should also be familiar with three main 1099 forms– 1099-NEC, 1099-MISC and 1099-K.
- 1099-NEC: This is the most common form, used to report nonemployee compensation of $600 or more.
- 1099-K: This form is primarily for reporting third-party payment transactions over $600.
- 1099-MISC: It's for reporting miscellaneous payments such as gifts, rent or award money.
Self-employment tax deductions
As a freelancer, you're in charge of your own business, including managing your schedule, finding clients and handling your taxes. While dealing with the self-employment tax rate might not be the highlight of your day, you can use your business expenses to minimize your tax bill.
There are numerous self-employment tax deductions available to freelancers, but whether you can claim them depends on your line of work and whether those costs are “ordinary and necessary” to your business.
These deductions not only reduce your self-employment taxes but also lower your taxable income, helping you pay less in income taxes overall. So, it's important to claim them whenever possible.
Some common tax deductions include:
- Internet and phone bill
- Vehicle mileage
- Startup costs (for small businesses)
- Business meals
- Office supplies
- CPA fees
- Legal fees
- Health insurance premiums
- Business-related software subscriptions
Tax credits for the self-employed
Tax credits can significantly reduce the amount of tax you owe, and as a self-employed individual, you may be eligible for certain tax credits that can help lower your tax bill. One common tax credit for the self-employed is the Earned Income Tax Credit (EITC).
The EITC is a refundable tax credit for low to moderate-income individuals and families. To qualify for the EITC, you must meet certain income requirements and file a tax return. Another valuable tax credit is the Child and Dependent Care Credit, which helps offset the cost of childcare expenses.
The IRS also offers the Clean Vehicle Credit to encourage drivers to go green by investing in electric or plug-in hybrid vehicles. It's a win-win situation - not only do you help reduce your carbon footprint, but you also get a tax incentive!
This nonrefundable tax credit can lower your tax liability when you purchase certain electric car models. So, by choosing an environmentally friendly vehicle, you're not only doing your part for the planet but also saving some money on your taxes!
For self-employed individuals, education tax credits can also be a valuable way to save money while investing in further education. The Lifetime Learning Credit and the American Opportunity Tax Credit are two common credits that may be available to self-employed taxpayers who are continuing their education. These credits can help with the cost of certain eligible education expenses.
Paying self-employment tax doesn’t have to be a hassle. FlyFin’s expert CPAs can handle the entire tax prep and filing process for self-employed individuals and offer unlimited tax support. AI also scans expenses to find every possible business deduction to lower your tax bill and maximize your savings.
What’s FlyFin?
FlyFin caters to the tax needs of freelancers, gig workers, independent contractors and sole proprietors.
But anyone can file taxes through FlyFin! FlyFin tracks all your business expenses automatically using A.I. technology.
Then, our CPA team files a guaranteed 100% accurate tax return for you – to save you a couple thousand dollars and a ton of time on your taxes.
In addition, you can download the FlyFin app and have your taxes filed in less than fifteen minutes, saving time and money.
Expert tax CPAs ensure 100%-accurate tax filing
A.I. finds every tax deduction, eliminating 95% of your work
On average users save $3,700
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