Freelancers, independent, consultant, side hustles, etc
Full-time as well as part time employment with W2
LLCs, S Corps and partnerships
It can be a challenge to save money for a new car or a dream vacation, let alone for retirement or a child's education. It can feel even more difficult to save money to pay your taxes, but for self-employed individuals, it's just as important as any of those other reasons we just listed. That's because if you don't save enough to upgrade your ride, you can simply keep the car you have. But if you're unable to pay your self-employment taxes when it's time, you could be on the hook for penalties from the IRS.
This is where a self-employment tax calculator can really save the day, but more on that later.
When you're self-employed, it might feel like your tax bill is huge at the end of the year, but in reality, there's every possibility that you can end up paying less in tax than if you were an employee of a company and received a W-2 at the end of the year. It's easy to see why that is when you look at the hundreds of tax deductions available to freelancers, independent contractors and self-employed individuals.
An employee for any corporation has taxes automatically deducted from their paycheck every two weeks. If you're a salaried employee in Wisconsin making $80,000 a year, and you file a tax return as a single person, you would pay about $10,350 in federal income tax and $5,600 in state taxes.
It matters which tax bracket you fall into, and you can find out with a federal tax rate calculator. Still, if you're a self-employed software developer or rideshare driver, for example, making $80,000 in Wisconsin, you could write off part of your rent as a home office expense or part of your gas and car insurance as business expenses.
With these and the many, many other deductions you can take, you could end up paying less than the salaried employee.
People who work for themselves and receive a 1099 form pay tax on the income they owe, but they also pay self-employment tax. Now, exactly what is self-employment tax? These are taxes that everyone who has income needs to pay, whether they work for an employee or for themselves. Technically, they're called FICA (Federal Insurance Contributions Act) taxes, but in the case of self-employed people, they're often called self-employment taxes.
FICA taxes pay for a couple of the most important national insurance programs Americans have to rely on: Social Security and Medicare.
It can be easy to get confused about the different taxes self-employed people have to pay, because some have more than one name. Self-employment taxes even have a third name we don't hear as often. SECA taxes is just another name for FICA taxes. The IRS often uses it because it is a federal act, the Self-Employed Contributions Act (passed in 1954), that requires self-employed people to pay these taxes. You might also see SE tax used sometimes, which is an abbreviation for self-employment tax.
It might feel better to know that, if you must pay a federal self-employment tax, at least it funds programs that provide income and health insurance to people who need it. That includes your friends and family who are aging out of the workforce or who get injured - and probably you one day. But right now, it might be more important to know the actual numbers and how to calculate self-employment taxes.
The total self-employment tax rate is 15.3%. Part of it is for Social Security and part for Medicare.
How much is that out of your $80K working as a software developer or rideshare driver? You would owe $12,240. Before you get sticker shock, remember you can write off a ton of business expenses (maybe more than you think) to lower that number by a lot. In fact, the IRS is not without a heart in that they let self-employed people write off half the amount of their self-employment tax from their taxable income. For W-2 employees, this half is paid to the IRS by their employer.
Remember when we said your tax deductions can lower your self-employment tax to less than what an employee would pay? Maybe you own a business making and selling your own clothing line or selling a line of nutritional supplements, and you're a single-filer. All of your sales are processed using third-party apps like Venmo and PayPal, and at the end of the year, you receive a 1099-K form, which reports those sales to the IRS and you.
Those 1099-Ks are the most important part of your tax return because they show your entire income, which gets reported on your 1040 form, the tax form that every American with an income has to file with the IRS each year. But, you work out of a home office, so a portion of your rent can be written off from your taxable income. And you use software to keep track of your sales and spend money on marketing in the form of online ads, all of which are tax deductible.
You can also write off part of your phone and internet bill because you use a percentage of it for your business. You meet vendors over lunch once or twice a month, too, and these meals are deductible, plus the office supplies you use … well, you get the picture. The list goes on, and all these write-offs get subtracted from your income, which means there's less income you need to pay tax on.
If all those deductible business expenses add up to $15,000 for the year, self-employment tax only gets applied to $65,000 ($80,000-$15,000). Plus, half of the self-employment tax you would pay can be written off your taxes, too.
Keeping track of all your business expenses so you don't miss a single tax write-off is, of course, the goal if you want to pay as little as possible in taxes. But it's not always easy to use spreadsheets and save all your receipts throughout the year. That's why FlyFin exists. An app that automatically tracks all of your business expenses can be a game-changer. Its A.I. finds every possible tax write-off.
The short answer? Yes, you can use a self-employment tax calculator. The long answer? You absolutely should use a self-employed tax calculator. It's by far the easiest way to know how much you will need to pay the IRS when tax time is upon you, and it can give you a self-employment tax estimate. When you're self-employed, you've got more to worry about than W-2 employees do. Don't add figuring out how to calculate self-employment tax on your own to it.
You can find all sorts of reliable calculators to help with taxes. Need a quarterly tax calculator, a federal income tax calculator, or even a mortgage payment calculator? They're out there, and if you choose the right ones, you can use them to get reliable information you can use to make the best tax decisions possible. Figuring out how to calculate taxes for self-employed people is a lot of work, and a handy tax calculator can take some of the guesswork out.
And when you use a self-employment tax calculator to find out how much tax you're likely to owe, you're one step closer to avoiding late fees or underpayment penalties.