Self-employed people pay 15.3% self-employment tax on net earnings. Quarterly estimated payments are required since taxes aren’t withheld. An S Corporation election can minimize owners’ self-employment taxes. If net earnings are under $400, you may not need to file. You must pay self-employment tax even if receiving benefits. Allowable business deductions reduce taxable income. Contributing to retirement accounts also lowers taxable income.
How Do Self-Employed Individuals Reduce Taxes?
Take deductions to lower net income and correspondingly reduce self-employment tax. Being self-employed means paying the whole Social Security and Medicare tax yourself.
Entrepreneurs can deduct half of their self-employment taxes from their federally taxable income. For example, if you owe $7,650 in self-employment tax, you can now deduct $3,825 from your federally taxable income. This reduces your overall taxable income without affecting the self-employment tax.
Self-employed individuals pay more taxes than W-2 employees since they cover the entire employment tax on their own.
According to the IRS, self-employed taxpayers who expect to owe over $1,000 must make estimated tax payments quarterly. The self-employment tax rate for 2023 includes the 12.4 percent Social Security tax and 2.9 percent Medicare tax on net earnings.
Tax Filing as a Self-Employed Individual
In the UK, self-employed individuals pay taxes through a Self Assessment tax return. If newly self-employed, you must submit a Self Assessment by January 31st following the year you started your business.
Earning Threshold for Self-Employment Taxes
If net earnings are under $400, you may not need to file. However, self-employed individuals must still pay full Social Security and Medicare taxes. An S Corporation election and contributing to retirement accounts can help reduce overall taxable income.