Running your own show means you’re both the boss and the payroll department. This guide breaks down what you owe, when you owe it, and how to keep more of what you earn—without headaches.
1) What counts as “self-employed”?
- Sole proprietor / single-member LLC (no S-Corp election)
- Independent contractor / freelancer (1099)
- Partners in a partnership or multi-member LLC (your K-1 income)
If you get a 1099-NEC (or just deposit client checks), you’re self-employed for tax purposes.
2) The three taxes you’ll deal with
- Income tax on your net profit (revenue minus deductible expenses).
- Self-employment (SE) tax for Social Security & Medicare (think: both sides of payroll tax).
- State taxes (income, sales, franchise—varies by state).
Key idea: SE tax is calculated on net earnings, not gross revenue. Good records matter.
3) Estimated quarterly taxes (avoid penalties)
The IRS expects you to pay as you go. Most self-employed folks make four payments:
- April 15, June 15, September 15, January 15 (for the prior year’s Q4).
- Use last year’s return as a baseline, then update using your current-year profit.
Quick method:
- Project your annual net profit.
- Apply a blended effective rate (income + SE tax).
- Divide by 4. Adjust each quarter as your numbers change.
4) What can you deduct? (the big hitters)
- Home office (regular & exclusive use): portion of rent/mortgage interest, utilities, internet, insurance.
- Vehicle: standard mileage or actual expenses (choose one method per year).
- Equipment & software: laptops, phones, subscriptions, domain/hosting.
- Advertising & website: design, ads, email tools, CRM.
- Professional services: bookkeeping, tax prep, legal.
- Education: courses directly improving your current business.
- Travel & meals: business purpose, who/what/where; keep receipts.
- Health insurance premiums (self-employed health deduction, if eligible).
- Retirement contributions (see next).
Rule of thumb: “Ordinary and necessary” for your business—and documented.
5) Build a retirement stack (tax savings + future you)
- Solo 401(k): employee deferral + employer profit-share; Roth options are common.
- SEP-IRA: simple, employer-only contributions (pro-rata for eligible employees).
- Cash Balance/Defined Benefit: for consistently high income.
Set your annual target mid-year so cash flow supports funding on time.
6) SE tax in plain English
Employees split Social Security/Medicare with their employer. You’re both, so you pay the full amount via SE tax (part of your Form 1040, Schedule SE).
- You’ll also take an above-the-line deduction for the “employer half,” which lowers income tax (not SE tax).
- Rates and wage bases change—your software or CPA will compute the exact numbers.
7) Simple example (ballpark math)
Let’s say your revenue is $120,000 and deductible expenses are $40,000 → net profit $80,000.
- You’ll owe income tax on $80,000 (after other adjustments/credits).
- You’ll owe SE tax on your net earnings from self-employment (calculated on Schedule SE).
- You’ll likely make/true-up quarterly estimates so you’re square by year-end.
(Numbers are illustrative; actual results depend on filing status, state, credits, and current rates.)
8) Records & tools (make audit-ready your default)
- Separate bank/credit card for business.
- Receipt app (snap & tag business purpose).
- Monthly close: reconcile accounts, categorize, review P&L.
- Mileage log (app or odometer method).
- Save invoices/contracts/W-9s for anyone you pay as a contractor.
9) Compliance corner (don’t skip these)
- Collect W-9s before paying contractors; file 1099-NEC in January.
- Sales tax (if applicable): register, collect, file on schedule.
- Local licenses and state business taxes/fees.
- If you hire, set up payroll properly (don’t “1099” employees).
10) When an S-Corp makes sense
If your net profit is consistently healthy, electing S-Corporation status (for your LLC or corporation) can lower SE taxes by splitting pay between reasonable salary (W-2) and distributions.
Trade-offs: payroll setup, extra filings, and the need to document a defensible salary. Model it before you switch.
11) Quarterly game-plan (save this checklist)
Every quarter
- Close books & reconcile
- Update tax projection (income + SE tax)
- Pay / adjust estimated tax
- Review deductions (home office, mileage, subscriptions)
- Set aside retirement contribution $$
Year-end
- Time income/expenses (big purchases, invoicing)
- Consider gain/loss harvesting (coordinate with personal return)
- Back up books & receipts; prepare 1099 list
FAQ (fast answers)
Do I need a business entity to deduct expenses?
No. Deductions flow from running a business with profit intent, not the entity type.
What if I started mid-year?
You still file Schedule C (or partnership return) for the period you operated and pay SE tax on net earnings.
Do I need to keep paper receipts?
Digital copies are fine—just be sure they show date, amount, vendor, and business purpose.
How much should I set aside for taxes?
Many set aside 25–35% of net profit as a starting point, then refine with quarterly projections.
Bottom line
Self-employed taxes aren’t scary when you run a rhythm: clean books, quarterly estimates, smart deductions, and a retirement plan you actually fund. Get those right and you’ll keep more of what you earn—without April surprises.
If you’re in Southern Utah, Thompson Tax & Trust can set up your quarterly system, model S-Corp savings, and keep you compliant. Book a quick consult and let’s keep more of what matters.
Disclaimer: This article is general information, not tax advice. Rules change and your situation is unique—consult a tax professional before acting.
