Are You Self-Employed? What to Know About Tax Time

These days, a growing number of workers do not have traditional full-time salaried positions. In fact, there were 58 million freelancers in the U.S. in 2021.¹

If you’ve made or are making a transition to self-employment, in essence, you have become your own Human Resources and Payroll Department. Those notes on your old paystubs that you may have paid little attention to are likely tax liabilities for which you are now directly responsible.

Most workers are subject to the “Pay-As-You-Go” or (PAYG) system, where income tax is taken from each paycheck and sent to the Internal Revenue Service. It’s no different for the self-employed. The IRS expects you to make quarterly estimated payments if you anticipate owing $1,000 or more on your taxes.

Set Aside Money via a Separate Account

For some, being self-employed may require a little extra planning. Typically, on payday, our checking accounts have cash so that we can buy groceries, pay the mortgage or rent, and spend some money going out to dinner and drinks with friends. When you are self-employed, the balance in your account following each pay period could cause you to end up short when it comes to paying quarterly taxes. An inability to pay on time or not at all means a late fee or a failure-to-pay penalty from the IRS.

Prevent this situation from happening to you! One way to make sure you can make each payment on time and in full is to set up a separate account specifically for funding estimated taxes. This way, each time you get paid, a part of your tax payment is deposited to this account. Set it and forget it so you don’t end up short!

How Much Should be Set Aside?

A good starting point to determining how much should be put in a separate account for your estimated tax payment is in the range of 30% of each paycheck. It may seem like a high percentage, but you need to account for Social Security, Medicare, Federal and any state tax liabilities. Check with your tax advisor to determine the appropriate amount to set aside for your individual situation.

For W-2 employees, Social Security and Medicare taxes are shared between the employer and employee. When you are self-employed, you function as both and are taxed as such. The tax will be at a minimum rate of 15.3% and can increase if certain income levels are met.²

When am I Expected to Pay?

Here’s a handy chart to determine when you need to pay these taxes. The following is the 2023 schedule from the IRS:

Source: Internal Revenue Service
NOTE: If the 15th falls on a weekend or a holiday, then the due date is the next weekday.

Find a Trusted Advisor

Whether you’ve been an independent contractor for years or are newly self-employed, you don’t have to figure this out alone. At Jemma Financial, our knowledgeable financial advisors can help you open an account and create a plan to meet your financial goals.

¹ “Freelance, side hustles, and gigs: Many more Americans have become independent workers.” McKinsey & Company, 8/23/22.
² “Self-Employment Tax (Social Security and Medicare Taxes),” IRS.gov.