Self-Employment Tax and IRS Estimated Tax Payment

It’s a great feeling to be your own boss and make money at it. At least, until you discover that you are now responsible for paying self-employment tax and may be required to make estimated tax payments. I have been paying self-employment tax over the last few years; however, I have not made an estimated tax payment to the IRS yet.  Instead, I have been increasing the federal and state income taxes withholding from my job to cover the increasing tax burden. In this article, I’ll try to cover some of the basic as it pertains to self-employment tax and estimated tax payment.

Self-Employment Tax

What is Self-Employment Tax?

Normally when you work for an employer, they will pay half of your Social Security and Medicare tax, and withhold taxes from your paycheck to cover your tax bill. But when you are in business for yourself, you have to pay the entire amount your own. This self-employment tax rate is 15.3%, and it consists of two parts: 12.4% for Social Security and 2.9% for Medicare.

IRS Form 1040-ES

Fortunately, you can deduct half of your self-employment tax (or SE tax) in figuring your adjusted gross income. Wage earners cannot deduct social security and Medicare taxes.

Who Must Pay Self-Employment Tax?

You must pay SE tax and file Schedule SE (Form 1040-ES) if either of the following applies.

  • Your net earnings from self-employment (excluding church employee income) were $400 or more.
  • You had church employee income of $108.28 or more.

The SE tax rules apply no matter how old you are and even if you are already receiving Social Security or Medicare.

How To Calculate Self-Employment Tax

You figure SE tax yourself using Schedule SE (Form 1040-ES). For 2009, only the first $106,800 of your combined wages, tips, and net earnings is subject to any combination of the 12.4% social security part of the self-employment tax. That is if your income is less than $106,800, simply multiply the amount by 15.3%. If your income is more than $106,800, then multiply the amount by 2.9% for Medicare, and add $13,243.20 (maximum Social Security tax) to the result.

Estimated Tax Payment

How To Make Estimated Tax Payment

Our system is a pay-as-you-go tax. This means you must pay the tax as you earn or receive income during the year. There are two ways to pay as you go: withholding and estimated taxes. If you expect to owe tax of $1,000 or more (including self-employment tax) when you file your return, you generally have to make estimated tax payments. To make estimated tax payment:

  1. Fill out your estimated tax form — Download Form 1040-ES from the IRS. The form includes a worksheet that walks you through the process of figuring out how much estimated tax you should be paying. You’ll need to have your prior year’s tax info handy. If you used a tax preparation software to prepare your tax return, it may be able to help you figure out the following year’s estimated tax liability based on your current year’s information.
  2. Pay your estimated taxes — Sign up for the Electronic Federal Tax Payment System (EFTPS). Once you register, the IRS will mail you a PIN number. The PIN takes a couple weeks to arrive, so plan accordingly. Once you have the PIN you can create your online profile and password at EFTPS, then you’ll be able to pay your estimated taxes online via direct debit.

When To Make Estimated Tax Payments

Normally, you have to pay estimated tax payment before your normal income tax return filing date deadline. However, you can make also choose to make 4 equal payments according to the IRS payment due date schedule. For example, 2009 estimated tax due dates are: April 15, June 15, September 15, and January 15 (2010).

These are just the basics and taxes can get complicated quickly — especially when you throw in state and city taxes into the mix. Despite my research and many hours spent reading about taxes, I am still not fully comfortable with my current tax situation and will most likely hire a tax advisor to help me with my 2009 taxes. After all, do it yourself can only get you so far in this world!

About the Author

By , on Sep 1, 2009
Pinyo
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo have enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

2013 Tax Center

important dates
2013 Important Tax and Filing Dates

Leave Your Comment (12 Comments)

  1. Paula Arnold says:

    Where do I report the estimated tax payment on my 2010 1040 form?

  2. Thanks for the heads up about having to register ahead of time to be able to get a PIN. That was information I haven’t seen anywhere else and it’s pertinent.

  3. Dusty says:

    My husband and I are self employed and pay estimated tax. We did not have the money to make our 3rd estimated tax that was due Sept 15th. We have the money now (end of Oct) so do we pay and expect and penalty or wait until the Jan payment is due and double up?

  4. Llona says:

    If I pay estimated taxes, will it include everything; like social security

  5. Robert Giordano says:

    This is a unique situation for me.

    If I have a profit for the 1st quarter of approx $500, I technically owe Self Employment tax on 92.35% of that. However, with my individual taxes I have such high deductions that I owe no taxes even when the SE tax is thrown in. At the end of the year, the situation will be the same.

    1) Do I have to pay the SE tax on a quarterly basis anyway even though when computed into the individual taxes shows no taxes due?

    2) If I have a profit in the business and do not owe taxes after computing the individual tax return (including the SE due), do I get credit for Social Security?

    Any help with these 2 questions would be appreciated…

    Bob

  6. Mark Mares says:

    If I get a business License and business tax ID number and have the companies make the checks out to the company instead of my name. Then not pull any money out to pay myself until 2nd quarter or 3rd quarter of 2010 to myself. Do I personally have to claim the money on personal taxes for 2009? I only worked for three weeks on my independant contractor basis in 2009 and don’t want to claim it if I don’t have to. I also opened a business bank account so it won’t appear in my personal account.

  7. Alejandra says:

    Hello Guys
    I am working in domestic cleaning now, I want pay tax for self employed.
    I don’t know do it.
    My wages is £ 200 per month. I must pay tax for this income???
    I am married, my husband too is working.
    Somebody can help me???
    Thanks
    Alejandra

  8. Andy says:

    Consider starting a company (s-corp) like I did and get an accountant (about $150 – to $250) per month to take care of all your state and federal taxes. What’s better is that as a business you can write off your accountants fees and a whole host of other business/blogging expenses.

  9. Pinyo says:

    @ Stephanie PTY – Thank you Stephanie.

    @David – Thank you for your input. I thought I can only make quarterly payment. Being able to pay on demand is much better. You’re also the second person to recommend paying 1/3 of self-employment income. Thank you again.

  10. David Stewart says:

    You guys may be thinking this is more complicated than it is. Make your payments, keep track of them, and report the payments when you file your taxes. In and of itself, that isn’t very complicated.

    Now, if you want to try to actually figure out how much you’ll owe, that can complicate things, but not in a way that requires an accountant unless you want the accountant to calculate what . . . really, cannot be accurately calculated.

    So here’s what you can do: Sign up with the electronic payment system. Then, every time you get a paycheck that has SE tax due on it, pay a percentage of it via the electronic payment system. You can guesstimate what you’ll owe if you know what else you’ll be earning (or your spouse will) during the year, and just pay it as you receive it.

    For me, that’s 1/3 of my checks: I figure on the 12.4% plus roughly our marginal rate. Rather than pay quarterly, you can pay when you want (and that could be, I recommend, each check). That way, no quarterly huge pain when you have to pay but don’t have that much money. And it’s even worse if you skip your payments and have to pay it when you file your return the next year.

    And don’t forget your state will want some too if it has an income tax.

  11. “I have been increasing the federal and state income taxes withholding from my job to cover the increasing tax burden.”

    This is what I’ve been doing, and it’s worked so far. The problem this is year is that, with the exception of January, I haven’t had a W-2 job all year! But I know I haven’t made enough in SE income this year to put me over the $1,000-in-taxes-owed line, so I’m fine for 2009. 2010 I may need an accountant and estimated tax payments, but I’ll cross that bridge when I get there! :)

  12. DDFD says:

    Great overview of an important tax issue for Defensive Entrepreneurs!

Leave a Reply

Your email address will not be published. Required fields are marked *

*

Disclaimer

The information on this site is strictly the author's opinion. It does NOT constitute financial, legal, or other advice of any kind. You should consult with a certified adviser for advice to your specific circumstances.

While we try to ensure that the information on this site is accurate at the time of publication, information about third party products and services do change without notice. Please visit the official site for up-to-date information.

For additional information, please review our legal disclaimers and privacy policy.

Notice

Moolanomy has affiliate relationships with some companies ("advertisers") and may be compensated if consumers choose to buy or subscribe to a product or service via our links. Our content is not provided or commissioned by our advertisers. Opinions expressed here are author's alone, not those of our advertisers, and have not been reviewed, approved or otherwise endorsed by our advertisers.