Self-employment has several upsides. Including independence, limitless earning potential, and flexibility to make uninfluenced decisions. If you are now a self-employed professional, you are now your own boss.
Being in full control of your career comes with responsibilities. One of the duties you need to manage on your own is filing your taxes. You need to understand and comply with tax laws to avoid costly penalties with the Internal Revenue Service (IRS), the U.S. federal tax agency.
Unlike full-time and part-time employees whose employers deduct their taxes from their paychecks, if you are self-employed, you are in charge of tracking the taxes you owe and paying them on time. Hence, you need to be tax literate.
Self-employed tax obligations
Self-employed professionals, such as freelancers, independent contractors, and home-based business owners are subject to quarterly estimated taxes instead of taxes withheld from their paychecks throughout the year. In general, you must pay estimated taxes if you expect to owe at least $1,000.
The due dates for quarterly estimated taxes are the following:
- 1st quarter (January 1 to March 31) — April 15
- 2nd quarter (April 1 to May 31) — June 15
- 3rd quarter (June 1 to August 31) — September 15
- 4th quarter (September 1 to December 31) — January 15 of the following year
If the deadline falls on a weekend or a holiday, the next business day becomes the new due date.
Do not pay late, or skip making a quarterly payment to avoid penalties.
The IRS considers self-employed individuals as both an employer and employee; therefore, they need to pay both as an employer and an employee. Currently, the self-employment tax rate is 15.3%. The rate is split into two parts: 12.4% is for Social Security and 2.9% is for Medicare.
Self-employment tax rules apply no matter the age of the self-employed professional, even if he or she is already receiving Social Security and Medicare.
Form 1040-ES, Estimated Tax for Individuals
Since self-employed professionals are solely responsible for their taxes, they must be familiar with the tax forms that apply to them. Use Form 1040-ES to calculate the amount of taxes you owe and pay estimated quarterly taxes.
You can obtain a downloadable copy of Form 1040-ES from the official IRS website that you can fill out manually. If you prefer to fill it out electronically, you can use an online document-filler application. You also have the option to hire a tax professional to assist you with tax procedures.
Fill out all items of Form 1040-ES accurately to avoid any problems with the U.S. federal tax agency. Use the estimated tax worksheet to determine the amount of taxes you need to pay.
Form 1040-ES contains four separate payment vouchers, labeled one through four. You will use one for each payment period when you send a payment to the IRS. Each payment voucher requires your taxpayer information and the amount of estimated tax you are paying.
The instructions section of Form 1040-ES has an Estimated Tax Worksheet to assist you in figuring out the taxes you owe and a Record of Estimated Tax Payments table to help you keep track of the payments you have made throughout the year.
To pay self-employment tax, you must have a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). If you do not have an SSN, you can apply using Form SS-5, Application for a Social Security Card. If you are not eligible to get an SSN, you can apply for an ITIN using Form W-7, Application for IRS Individual Taxpayer Identification Number.
Paying estimated tax
There are several ways to pay your estimated taxes.
Online
You may pay your estimated tax online via the official website of the IRS (IRS.gov/Payments). You can pay using any of the following methods:
- IRS Direct Pay — For online transfers using your checking or savings account.
- Pay by Card — For payments using a debit or credit card.
- Electronic Fund Withdrawal (EFW) — EFW is an e-file/e-pay option when filing federal taxes electronically using tax preparation software, through a tax professional or the IRS.
- Online Payment Agreement — For monthly installment agreement if you cannot pay in full by the due date of your tax return.
- IRS2Go — IRS2Go is the official mobile application of the IRS you can use to access Direct Pay or Pay by Card.
By phone
Methods to select from when paying by phone:
- Debit or credit card — Call one of the debit or credit card service providers of the IRS:
Official Payments (officialpayments.com)
1-888-872-9829
Link2Gov Corporation (PAY1040.com)
1-888-729-1040
WorldPay, US, Inc. (payUSAtax.com)
1-844-729-8298
- Electronic Federal Tax Payment System (EFTPS) — You need to enroll at the official EFTPS website to use this method. It allows you to make a one-time payment or set up recurring payments up to a year in advance.
By cash
Cash is an in-person payment for individuals provided through retail partners with a maximum of $1,000 per day transaction. You must first register online at officialpayments.com/fed, the official payment provider of the IRS, to make a cash payment.
By mail
You can mail in your payment to a specific address, based on where you live. Together with the applicable payment voucher, send a check or money order to the right address:
| If you live in … | Then, send it to “Internal Revenue Service” at … |
| Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Texas | Internal Revenue Service
P.O. Box 1300 Charlotte, NC 28201-1300 |
| Arkansas, Connecticut, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, New Jersey, New York, Oklahoma, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia, Wisconsin | Internal Revenue Service
P.O. Box 931100 Louisville, KY 40293-1100 |
| Alaska, Arizona, California, Colorado, Hawaii, Idaho, Kansas, Michigan, Montana, Nebraska, Nevada, New Mexico, Ohio, Oregon, North Dakota, South Dakota, Utah, Washington, Wyoming | Internal Revenue Service
P.O. Box 802502 Cincinnati, OH 45280-2502 |
| A foreign country, American Samoa, or Puerto Rico (or are excluding income under Internal Revenue Code 933), or use an APO or FPO address, or file Form 2555, Foreign Income Earned, or 4563, Exclusion of Income for Bona Fide Residents of American Samoa, or are a dual-status alien or nonpermanent resident of Guam or the U.S. Virgin Islands | Internal Revenue Service
P.O. Box 1303 Charlotte, NC 28201-1303 |
| Guam: Bonafide residents. | Department of
Revenue and Taxation Government of Guam P.O. Box 23607 GMF, GU 96921 |
| U.S. Virgin Islands: Bonafide residents. | Virgin Islands Bureau
of Internal Revenue 6115 Estate Smith Bay Suite 225 St. Thomas, VI 00802 |
Note: Bonafide residents must prepare separate vouchers for estimated income tax and self-employment tax payments. Send the income tax vouchers to the address for bonafide residents and the self-employment tax vouchers to the address for non-bonafide residents.
