What You Should Know About Self Employment Taxes
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If you’re recently self-employed, don’t overlook the unique tax considerations that come with being your own boss.

Being self-employed brings many potential advantages, including being able to set your own hours or work from home. But it comes with some headaches, too — in particular, preparing for, filing, and paying self-employment taxes.

The self-employment tax is a Medicare and Social Security tax on the earnings of a self-employed individual. If you’re self-employed, you have to pay this tax in addition to income tax and any other applicable taxes.

If you’ve been employed by someone else before, you’ve probably noted on your paychecks where your employer deducted Medicare and Social Security contributions from each check for you. If you’re self-employed, these contributions to Medicare and Social Security are essentially made through your payment of the appropriate self-employment taxes.

When you’re self-employed and subject to the self-employment tax, dealing with taxes is no longer an annual activity. It’s now a quarterly activity, and it requires considerable preparation and recordkeeping on your part, so you’ll want to consider these important points and make sure managing your taxes is a priority:

1. Find out if the IRS thinks you're self-employed.

If you’re in business for yourself, work as an independent contractor or sole proprietor, or are a member of a partnership that carries on a trade or business, you likely must pay taxes as a self-employed person. Even if you are employed full time by someone other than yourself, and your self-employment business is a part-time endeavor, the IRS probably sees you as self-employed.

2. Determine whether you meet the self-employment income threshold.

Not everyone who is self-employed has to pay self-employment taxes on their income. The IRS has a net earnings threshold of $400, so if your net earnings are $400 or more, you must pay self-employment taxes in addition to your other tax obligations, including income tax. (The rules are different for church employees’ income.)

Determine which side of $400 you fall on by subtracting your business expenses from your business income. If what’s left is a profit of $400 or more, you’ll need to pay taxes on that amount. Also, even if you do not owe self-employment taxes, you’ll want to be aware of tax filing requirements, which may obligate you to file a tax return regardless.

For wages earned in 2016, the self-employment tax rate is 15.3 percent; income taxes are paid in addition to that amount.

3. Determine whether you must pay quarterly estimated taxes.

The IRS requires that self-employed individuals pay estimated taxes every quarter as long as you expect to owe more than $1,000 for the year. The IRS provides a worksheet to help you figure out how much you'll owe each quarter.

4. Deduct self-employment expenses.

When you’re self-employed, you can deduct certain kinds of business expenses from your tax bill. For instance, if you work from home, you may be able to deduct a portion of your mortgage or rent, as well as a portion of other bills like heat.

You may also be able to deduct the cost of doing business, such as meeting a customer for lunch or your monthly cell phone bill if you use your cell phone primarily for work.

Keep good records of all expenses throughout the year. You might want to use a separate credit card just for business expenses, which makes it easier to keep a paper trail of business expenses.

A tax professional with experience working with self-employed people can help you understand these and other tax-related issues. For more information on filing taxes, visit the Regions Tax Center.

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This information is general in nature and is provided for educational purposes only. Regions makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented. Information provided should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Regions encourages you to consult a professional for advice applicable to your specific situation.