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Calculating Self-Employment Taxes: How Much Should You Set Aside for 1099 Taxes?

Use our free self-employment calculator to calculate the exact amount of self-employment tax you need to pay every quarter.

In 2014, the United States had around 53 million freelancers. By 2020, this number rose to 59 million.

Post-pandemic job cuts have nudged more people to become freelancers, independent contractors, or the sole proprietors of small businesses. More professionals are also investing in their side hustles and eventually turning it into a core business.

Considered as self-employed, individuals falling under these categories will need to file Form 1099-MISC. To find out how much money you can make after taxes, follow this useful guide for calculating your self-employment taxes.

What Exactly Is Self-Employment Tax?

As an employee, your company typically takes out a percentage of your paycheck for the taxes owed by you and pays it directly to the Internal Revenue Service (IRS). These taxes go towards Social Security, disability insurance, and Medicare.

But if you are a self-employed individual, there is no scope for paycheck withholding - you are expected to pay these taxes on your own.

If you make over $400 a year or have a church employee income of $108.28 or more, you must pay income as well as self-employment tax. For this, you need a Social Security number (SSN) or an individual taxpayer identification number (ITIN).

As a freelancer, you may be wondering how much you should set aside for 1099 taxes. Essentially, you should save up to 30% of your earnings to cover both income tax and self-employment taxes every quarter.

Try out our free Self-Employment Tax Calculator

What Is the Tax Rate for Self-Employment Taxes?

The self-employment rate, taxed at 15.3%, includes 12.4% for Social Security and 2.9% for Medicare or hospital insurance.

For 2021, Social Security tax only applies to the first $142,800 of your collective income from self-employment and paycheck. Beyond that, no extra tax is charged.

However, there is no limit for self-employment tax on Medicare. No matter how much you earn, Medicare tax will be charged on collective wages and self-employment income.

You can make estimated tax payments via the Electronic Federal Tax Payment System (EFTPS). These are due on April 15, June 15, September 15, and January 15 of the following financial year.

How Should You Calculate Self Employment Taxes?

The amount of self-employment tax you pay depends on a couple of factors.

The first step is to understand how much you have earned. Then, you can calculate your net earnings by subtracting your business expenses from your revenue. Typically, 92.35% of your net earnings from self-employment are subject to self-employment tax.

Let's look at a few examples to figure out how self-employment taxes can be calculated:

Scenario 1: If You Earn Less Than $142,800

Michelle runs her own microblading salon in Los Angeles, California. Her business generates roughly $120,000 per year.

Michelle won't be paying taxes on this entire amount, only 92.35% of it. Thus, she must multiply her net earnings by 0.9235. Her taxable income would then be:

120,000 x 0.9235 = $110,820

Since self-employment is taxed at 15.3%, Michelle should now multiply her taxable income by 0.153.

110,820 x 0.153 = $16,955.46

This final amount is what Michelle needs to set aside for self-employment taxes.

Scenario 2: If You Earn More Than $142,800

Cindy is a Seattle-based costume designer whose income is $155,000. Her taxable income would be:

155,000 x 0.9235 = $143,142.5

But unlike the previous example, there is an extra step. This is the amount on which Medicare will be taxed at 2.9%. Cindy's Medicare taxes would be:

143,142.5 x 0.029 = $4,151.13

Social Security will be taxed only on $142,800 at the rate of 12.4%. This amount would be:

142,800 x 0.124 = $17,707

To calculate her total self-employment tax, Cindy must add her Medicare and Social Security taxes:

Additional Taxes

If your net earnings from self-employment exceed a certain figure, then an additional 0.9% Medicare tax may apply, as follows:

  • Single: $200,000
  • Married filing jointly: $250,000
  • Married filing separate: $125,000
  • Head of household: $200,000
  • Qualifying widow(er) with a dependent child: $250,000

It can be a little overwhelming to calculate your taxes, especially if you switched more recently into a freelance role. However, with the support of tax calculators and (link: text: professional bookkeeping) support like Fincent, you can get these answers with ease.

What If You Have a Job and a Side Hustle?

If you have a side hustle along with a day job, your self-employment taxes may vary.

Say you have a full-time job as a software developer, and on weekends moonlight as an online coding teacher. You make $150,000 on the job and $20,000 per year as a coding instructor.

Your employer will withhold Social Security taxes on $142,800 of your wages. Since your paycheck exceeds this amount, you don't owe any more taxes on Social Security.

However, you'll need to pay 2.9% in Medicare taxes on the money earned minus expenses on your side hustle.

Planning and Paying Self Employment Tax on Time

Here's a quick guide on how to pay taxes on 1099 income:

  • The best approach is to save your profits right away and build a small corpus that will go towards your taxes every year.
  • You can consider the full years' earnings after deducting expenses and divide them by four.
  • If you don't pay your self-employment taxes, the IRS charges you a "failure-to-file" penalty. The penalty is 5% per month on the amount of taxes you owe, to a maximum of 25% after five months.
  • If you owe $1,000, you will have to pay a $50 penalty for every month you don't file your taxes, up to $250 after five months. By paying your taxes every quarter, you save around $313 in penalties!
  • The key is to plan your spending, savings, and payment schedules through the year.

How to Reduce Your Self Employment Tax

Oftentimes, the taxes we pay increase due to a lack of organization and access to the right information.  But you can reduce your self-employment taxes with these best practices:

  • Track Every Business Expense: Small businesses and self-employed individuals have access to almost 15 tax deductions and benefits. Make sure you track all your business expenses and deduct these from your net earnings.
  • File Jointly: Both income taxes and self-employment taxes significantly reduce if you file jointly with your spouse. If you are married, this is a great benefit to leverage.
  • Shift to an S Corp Status: By electing to have your (link: text: business taxed as an S corporation), you can pay Social Security and Medicare taxes only on your salary, unlike regular LLCs, which pay self-employment taxes on 100% of their share of the profits. A tax professional can help you understand if your business can benefit as an S corp.

Avail Key Tax Deductions and Benefits

As a self-employed individual, you incur several expenses along the way. The good news is that there are several tax deductions that can lower your taxable income and increase profits.  

Here are some of the key business expense heads to consider when calculating your taxable earnings:

  • Home Office: The cost of your workspace used exclusively for your business, whether owned or rented, can be deducted as an expense.
  • Vehicle Usage: If you use your car for business, the expenses are tax-deductible. Keep all mileage records, dates, and reasons for each trip.
  • Education: If you invest in a course to skill up in your existing line of work, this comes under tax-deductible expenses.  
  • Startup Costs: You can deduct up to $5,000 in year one of your business becoming active.
  • Health Insurance Premiums: You can deduct all health, dental, and qualified long-term care (LTC) insurance premiums.
  • Meals: This is a tax-deductible business expense when you travel for a conference or meet a client.  
  • Business Insurance: If you invest in any insurance to protect your business, such as fire, car, or business liability insurance, you can claim a tax deduction.
  • Rent: If you rent out an office space or any equipment, you can deduct these costs.

You can also claim deductions on phone and internet bills, travel, interest on a business loan, publications and subscriptions, advertising and marketing, and retirement plan contributions.

The Takeaway

Understanding the basics of self employment and paying your taxes on time will help you run a more efficient business - not to mention maximize your profit margins.

However, you may prefer to outsource this process and focus your time and energy on the business itself. Fincent, a professional bookkeeping service that caters to small, creative partnerships, is here to support you!

Find out how we take care of all your bookkeeping needs so you are free to grow your business.

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