How to Calculate Taxes When Self Employed

Self-employed people enjoy the convenience of being their own boss and being able to set their own schedules. However, they are completely responsible for paying their own taxes. Self-employed individuals must pay self-employment taxes and estimated taxes. Self-employment taxes consist of all Social Security and Medicare taxes. Estimated tax consists of the paying quarterly on money that is not subject to withholding.

Calculating Self-Employment Taxes

• 1. Use Schedule C or Schedule C-EZ to determine what your net income for the year is. Net income typically equals your total business revenue minus your total business expenses, such as operations costs.
• 2. Find your net earnings by multiplying your net income by 92.35 percent. If your net earnings are under $400, you do not have to pay self-employment taxes, but if your earnings are over $400, you have to pay self-employment taxes.
• 3. Multiply your net earnings up to $106,800 by 15.3 percent (the Social Security and Medicare tax rates), and multiply any earnings over $106,800 by 2.9% (the Medicare tax rate). Add the two amounts together to determine what your total self-employment taxes are.
• 4. Factor in your deductions on the "Adjustments" section of the 1040, where you can deduct half of your self-employment tax in determining your adjusted gross income, and file your Schedule C or Schedule C-EZ with your 1040.

Calculating Estimated Taxes

• 1. Obtain your adjusted gross income from your previous year's tax return, and add any anticipated additional income for the new tax year to that figure. If you anticipate your income to be less than the previous year, subtract the anticipated lesser amount from the previous tax year's earnings.
• 2. Review the previous year's list of itemized deductions, and make any anticipated additions or subtractions from those figures for the new tax year to determine your estimated deductions for the new tax year. If you do not itemize or have deductions amounting to less than the Standard Deduction, use the Standard Deduction in your figuring. The current Standard Deduction is $5,450 for a single taxpayer, $8,000 for a head of household and $10,900 for married couples filing jointly. Subtract your estimated deductions from your estimated income in Step 1.
• 3. Subtract any personal exemptions and tax credits from your figures, and calculate your annual federal tax payment required by referring to the tax table rates.
• 4. Adjust the tax amount calculated in Step 3 by multiplying it by 90 percent. You can pay your estimated taxes based upon 90 percent of your estimated taxes for the current year, or based upon 110 percent of the tax paid on the previous year's tax return, whichever is lower.
• 5. Divide the annual amount calculated in Step 4 by four to determine the estimated quarterly payments to be paid on April 15, June 15, Sept. 15 and Jan. 15 of the current year.