Paying estimated taxes when you are self employed

In the United States, most people pay the following income taxes:

Federal Income Taxes
FICA Taxes
State Income Taxes

Most states have an income tax but there are currently seven states that do not impose a state income tax on their residents. Those states are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

FICA stands for Federal Insurance Contributions Act. It consists of a 6.2% tax for social security benefits, and 1.45% for Medicare benefits when you retire, for a total of 7.65% of your income. The employee pays 7.65% of their income which is usually taken out of their paycheck. Their employer has to “match” that amount and pay 7.65% as well. This means that the total amount being paid on behalf of the employee is 15.3%. In 2017, any income above $127,200 is not subject to the 6.2% Social Security portion of the FICA tax.

When someone is self-employed, there is no employer to match the 7.65%. This means that the self-employed individual must pay the employee and employer portion of the tax totaling 15.3%. This is called “self-employment” tax. A self-employed individual must also pay federal income tax and state income tax (unless they are in a state that does not impose a state tax). A self-employed individual must estimate the amount of tax they will owe at the end of the year and pay it in four lump sums through the year. The following link will take you to the IRS website with the due dates for paying estimated federal taxes:
https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/estimated-tax/individuals/individuals-2

It’s best to check with your individual state to see if the state estimated income tax due dates are the same as the federal schedule.

To calculate the amount of taxes you will need to pay each quarter, please check with your Certified Public Accountant (CPA).

Leave a Reply

Your email address will not be published.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