1. Estimated Taxes: A Guide for the Self-Employed
Unlike W-2 employees who have taxes withheld from each paycheck, self-employed individuals, freelancers, and S-corporation shareholders must calculate and submit estimated tax payments to the IRS four times a year. Our estimated tax calculator helps you estimate your quarterly liabilities.
2. The Self-Employment Tax Liability
Self-employed workers must pay a 15.3% self-employment tax (Schedule SE) on 92.35% of their net business profits. This tax covers Social Security (12.4%) and Medicare (2.9%) obligations that are typically split between employees and employers in a standard job.
3. Calculating Your Quarterly Payments
To calculate quarterly payments, you must estimate your annual net business profit, subtract self-employment tax deductions, apply standard federal deductions, and compute your progressive income tax. The total estimated tax is then divided into four equal payments due in April, June, September, and January.
4. Avoiding IRS Underpayment Penalties
To avoid underpayment penalties, you must pay at least 90% of your current year’s tax liability or 100% of your prior year’s tax (110% if your AGI was over $150,000) through quarterly estimated payments or withholding from a W-2 job.