Understanding Self-Employment Tax (and How You Can Pay Less)

Ask a group of solopreneurs what the most daunting aspect of self-employment is, and somebody is sure to utter this word: taxes.

When you work for yourself, you’re responsible for paying self-employment tax on your income. While it might sound intimidating and complex, it’s not nearly as overwhelming as you might think—and it certainly shouldn’t be the thing that holds you back from pursuing your entrepreneurial dreams.

Need a little more convincing? We’re breaking down the basics of self-employment tax in this straightforward guide.

What Exactly Is Self Employment Tax?

Self-employment tax is the tax that self-employed people—like freelancers, independent contractors, and small business owners—pay to cover Social Security and Medicare.

When you’re traditionally employed, these taxes are automatically withheld from your paycheck. Plus, your employer splits these taxes with you. However, when you work for yourself, you’re responsible for paying these taxes on your own—and you need to pay the full amount yourself.

Currently, the self-employment tax rate is 15.3%. That breaks down to 12.4% for Social Security and 2.9% for Medicare. But, if you earn above a specific income threshold, you could owe an additional 0.9% Medicare tax.

How Do You Pay Your Self Employment Tax?

You’ll pay your self-employment tax through quarterly estimated tax payments. Four times per year (typically in April, June, September, and January of the following year), you’ll estimate your annual income, subtract your business expenses, and calculate your self-employment tax by multiplying your net earnings by 15.3%.

You’ll also need to pay your income tax with your quarterly estimated payments. For that, you’ll use your estimated income and refer to the IRS’ tax brackets to calculate how much you owe. Worksheets for both self-employment tax and your estimated federal income tax are included with IRS Form 1040-ES. Or you can use the IRS tax withholding estimator.

When tax time rolls around each year, you’ll receive 1099 tax forms from your clients. This form reports how much you earned from that specific client. Any client that paid you more than $600 over the year should send you a 1099.

What is this form for? Think of it as a record that helps you report your income and helps the IRS track your earnings. You’ll submit your 1099s with your annual tax return when you report your actual income. Then you’ll find out if you overpaid through your estimated payments (and are getting a refund) or underpaid (and owe more).

Skip the tax hassles and let Lettuce handle the whole thing for you. Find out how. You can also check out Lettuce’s quarterly tax calculator to estimate how much you might owe. 

3 Tax Planning Strategies to Lower Your Tax Bill

When you’re a solopreneur, tax time can feel a lot like pulling a lever on a slot machine. The good news is that there are a few tax planning strategies for individuals that you can put into play to minimize what you owe (while still being compliant, of course).

1. Use Deductions to Your Advantage

One of the perks of being a solo business is that you can deduct (or “write off”) legitimate business expenses. This reduces your taxable income, which means you need to pay less in taxes.

When you’re wondering whether an expense is deductible or not, ask yourself this: Does this expense help your business generate revenue? If the answer is “yes,” that’s a legitimate deduction.

Keep track of your business purchases (and receipts) so that you can subtract them from your income and calculate your taxes more accurately. Even small expenses can add up and help to lower your tax bill.

Don’t want to do all of this bookkeeping yourself? Lettuce will set you up with a business bank account and automatically track and categorize all of your transactions for you.

2. Be Smart About Your Business Structure

Deductions can help you chip away at your tax obligations. But, the reality is that you need a lot of expenses to make a significant difference in how much you owe.

In contrast, your business structure is the most meaningful lever you can pull—specifically, electing to have your business taxed as an S Corp. What’s an S Corp? It’s a tax status or designation that impacts how your business is taxed.

When you’re a sole proprietor or an LLC owner, you pay self-employment taxes on your total taxable income. In contrast, when you complete an S Corp election, you only pay self-employment taxes on the salary you set for yourself. That can mean saving thousands in taxes every single year.

See how much you could save with our tax calculator and then learn how Lettuce can handle your entire S Corp election (yep, even all of the paperwork) for you.

3. Save For Your Future

You likely already know that it’s smart to save for your retirement—but it can make a real impact on your tax bill, too.

Your contributions to a qualified retirement plan—like a SEP IRA or a Solo 401(k)—are deductible. It’s another way to reduce your taxable income and lower your tax bill as a result.

You can put your retirement planning and savings on autopilot with Lettuce. Open your Solo 401(k) within minutes, and Lettuce will automatically distribute each payment accordingly.

Self-Employment Tax Isn’t Optional (But Struggling Is)

As a solo business owner, you need to pay self-employment tax. But while the taxes are obligatory, the hassles and headaches are optional.

With some thoughtful tax planning strategies and the right tools on your side, your self-employment taxes become just a normal part of working for yourself—rather than a major burden.

Ready to manage your taxes with less stress and more success? Get started with Lettuce today.