A joyful female business owner talks on the phone after learning key tips about the self-employment tax from Gate City Bank

5 Steps for Calculating & Filing the Self-Employment Tax.

Your entrepreneurial spirit guided you here and your business is flourishing, but tax season has arrived and you’re suddenly having to address the self-employment tax for the first time. Now what?

Unlike W2 employees who work for an organization and have their taxes automatically deducted from their paychecks – if you have your own business, do freelance work or operate as an independent contractor – you’ll take the reins when it comes to filing the self-employment tax, also known as the Self-Employment Contributions Act tax (or “SECA tax”). Sound complicated? It’s easier than one might think!

Here’s the gist: You’ll report on IRS Form 1040 how much your business earned and subtract any expenses from that total. From there, you can calculate the tax amount owed and pay it. If you end up with a profit of $400 or more, you’ll need to count it as income. And in the event you experience a net loss, you can deduct it to a limited amount. Fairly straightforward, right? Let’s explore more.

What Is the Self-Employment Tax?

When tax season rolls around, business owners not only pay income tax but the self-employment tax. And when the bill comes due, especially if you’re a first-time entrepreneur, you might do a double-take upon realizing that you’re suddenly paying considerably more than you might have been as an employee working at another business – because you’re no longer sharing the cost of Social Security and Medicare.

Take a deep breath. While keeping track of what you owe and covering your tax obligations may seem daunting at first, remember why you started your own business in the first place. You had a dream and brought it to life. You could have easily given up, but that’s just not your style. You’ve got this! And we’re right by your side to help you better understand the process and provide basic next steps.

  1. Calculate what you owe

    When preparing to file the self-employment tax, you first need to calculate how much you owe, and this largely depends on the IRS’ latest applicable figures. While those can change, here’s the basic approach: Multiply your net earnings by the percentage subject to tax (this has typically hovered slightly above 92%), then multiply that number by the percentage allocated for Social Security and Medicare.

    Note: It’s also important to understand any state and local taxes that might apply in your case.

  2. See what write-offs you qualify for

    After you’ve calculated how much you owe the IRS, you’ll want to figure out what business expenses qualify for a potential tax deduction. From supplies to advertising to employee compensation, there are many ways you can save by subtracting from your taxable income. Access a full and detailed list of tax write-offs by visiting the IRS’ website!

Pro Tip:

The day you realize how much you’ll save in write-offs is often a good time to consider strategic investments you could make for the future! Reach out to one of our experienced business lenders or treasury management consultants to help keep your venture on the up and up.

  1. Fill out your return

    Fill out IRS Form 1040, which officially records your income or loss. Since the paperwork can be intricate and detailed, it might be worth it to have a CPA assist with reviewing the document before you submit it to the federal government.

  2. Pay on time and in full

    If you end up owing more than $1,000 a year in taxes, you’ll most likely make quarterly payments. And while thinking about taxes this often may not sound fun, it’s actually helpful for you as a business owner! Especially when it comes to avoiding penalty fees and other headaches associated with waiting till the eleventh hour to add up expenses. Therefore, be sure to track the IRS’ quarterly tax-payment schedule.

  3. Make taxes a yearlong mindset

    Taxes are one of those things that can be easy to put in the back of your mind throughout the year, especially if you’re a busy entrepreneur with limited time. This is where it’s OK to ask for help in terms of budgeting for upcoming tax expenses and simply asking questions. By working with an accountant, financial advisor or other professional, you can experience less stress.

Handle Taxes Like a Boss.

Embarking on a solo business venture is what drives you. And by following these basic steps for calculating and filing the self-employment tax, you’ll be better positioned to journey into tax season with confidence, enjoying greater peace of mind along the way. You’re the captain of this ship, and the wind is in your sails – For a Better Way of Life.®

Related to This Article

A happy male business owner gazes toward the camera after learning about common tax write-offs from Gate City Bank

7 Common Tax Write-offs for Your Business

Interested in maximizing the benefits of your business expenses? Learn more about common tax write-offs and how they can help you save during tax season!

happy male business owner holds phone and tablet after learning how to secure ACH payments

Fight the Fraud: 5 Ways Your Business Can Secure Electronic Payments

Protect your business from wire fraud by following these five helpful ACH security best practices.

smiling young lady stands in front of her store after reading helpful article on business banking basics from gate city bank

9 Business Banking Basics You Need to Know

No matter what your business specialty is, there are a wide variety of resources and financing options available to help set you up for success. Learn more!