Introduction
Being self-employed offers flexibility and financial independence, but it also comes with tax responsibilities that differ from traditional employees. Unlike W-2 workers, self-employed individuals must report income, track business expenses, pay self-employment tax, and make estimated tax payments throughout the year.
This guide explains how to correctly file self-employment taxes, which IRS forms to use, and strategies to maximize deductions and reduce your tax bill in 2025.
Who Is Considered Self-Employed?
The IRS considers you self-employed if you:
- Work as a freelancer, independent contractor, consultant, or gig worker.
- Own a small business or side hustle.
- Earn income from online platforms (Uber, DoorDash, Etsy, Airbnb, Upwork, etc.).
Key Indicator: If you receive Form 1099-NEC instead of a W-2, you are self-employed for tax purposes.
IRS Forms Required for Self-Employment Taxes
| Tax Form | Purpose |
|---|---|
| Form 1040 | Main individual tax return |
| Schedule C (Form 1040) | Reports business income & expenses |
| Schedule SE (Form 1040) | Calculates self-employment tax |
| Form 1099-NEC | Reports non-employee income from clients |
| Form 1040-ES | Used for quarterly estimated tax payments |
| Form 4562 | Depreciation & asset deductions |
| Form 8829 | Home office deduction |
How Self-Employment Tax Works (IRC §1401)
Self-employed individuals must pay self-employment tax (SE tax), which covers:
- Social Security tax (12.4%)
- Medicare tax (2.9%)
- Total self-employment tax = 15.3% of net earnings
Self-Employment Tax Calculation
- Net self-employment income × 92.35% = taxable self-employment income.
- Taxable self-employment income × 15.3% = self-employment tax.
Example:
- You earn $50,000 from self-employment.
- Your taxable SE income = $46,175 ($50,000 × 92.35%).
- SE tax owed = $7,060 ($46,175 × 15.3%).
- You can deduct half of the SE tax ($3,530) on Form 1040.
Making Quarterly Estimated Tax Payments (IRC §6654)
Since self-employed individuals don’t have taxes withheld, they must pay estimated taxes quarterly if they expect to owe $1,000 or more in taxes for the year.
Quarterly Estimated Tax Deadlines for 2025
- April 15, 2025 – Q1 Payment
- June 17, 2025 – Q2 Payment
- September 16, 2025 – Q3 Payment
- January 15, 2026 – Q4 Payment
Action Step: Use Form 1040-ES to calculate and submit estimated tax payments online via IRS Direct Pay.
Self-Employment Tax Deductions (IRC §162)
Self-employed individuals can lower taxable income by claiming business deductions.
Common Deductions for Self-Employed Individuals
- Home Office Deduction (Form 8829) – Deduct $5 per square foot (up to 300 sq. ft.) or actual home expenses.
- Mileage Deduction (Form 4562) – Deduct $0.67 per mile for business-related driving.
- Health Insurance Deduction – Deduct self-employed health insurance premiums.
- Phone & Internet Expenses – Deduct the business portion of your phone and Wi-Fi costs.
- Business Equipment & Software – Laptops, cameras, software subscriptions, and office furniture.
- Retirement Contributions – Contributions to Solo 401(k) or SEP IRA are tax-deductible.
- Business Meals & Travel – Deduct 50% of business meals and 100% of business travel expenses.
- Marketing & Advertising – Website hosting, online ads, and promotional costs.
Example of Tax Savings
- A self-employed designer earns $80,000 but has $20,000 in deductible business expenses.
- Taxable income is reduced to $60,000, lowering their self-employment tax.
Action Step: Keep detailed receipts and records for all business-related expenses.
Retirement Plans for Self-Employed Individuals
Self-employed individuals can reduce taxable income and save for retirement through tax-advantaged accounts.
| Retirement Plan | Contribution Limit (2025) | Tax Benefit |
|---|---|---|
| Solo 401(k) | $69,000 | Contributions reduce taxable income |
| SEP IRA | 25% of net earnings (max $69,000) | Tax-deferred growth |
| Traditional IRA | $7,500 ($8,500 if 50+) | Contributions may be tax-deductible |
Action Step: Use Form 8880 (Saver’s Credit) to claim additional tax benefits.
Step-by-Step Guide to Filing Self-Employed Taxes
Step 1: Gather Income Records
- Collect 1099-NEC forms, PayPal, or Venmo transaction statements.
- If no 1099 was issued, report all cash income.
Step 2: Track Business Expenses
- Keep detailed receipts and use accounting software like QuickBooks or TurboTax.
Step 3: Report Business Income on Schedule C
- Fill out Schedule C (Form 1040) with total revenue and deductions.
Step 4: Calculate & Report Self-Employment Tax
- Use Schedule SE (Form 1040) to report Social Security & Medicare tax.
Step 5: File Electronically for Faster Processing
- E-file using IRS-approved tax software for accuracy and a faster refund.
- Opt for direct deposit to receive your refund quicker.
IRS Penalties for Not Paying Self-Employment Taxes
- Late Payment Penalty – 0.5% per month on unpaid taxes.
- Failure to File Penalty – 5% per month, up to 25% of the unpaid amount.
- Interest Charges – IRS charges interest on overdue taxes.
- Potential IRS Audit – The IRS monitors self-employed income closely.
Action Step: Always report all income and deductions accurately to avoid IRS penalties.
Frequently Asked Questions (FAQs)
1. Do I need to file taxes if my side hustle made less than $600?
Yes. Even if no 1099-NEC was issued, you must report all self-employment income.
2. Can I deduct business expenses without an LLC?
Yes. Sole proprietors can deduct expenses without forming an LLC.
3. How do I lower self-employment taxes?
- Deduct business expenses to lower taxable income.
- Contribute to a Solo 401(k) or SEP IRA.
4. What happens if I don’t pay estimated taxes?
The IRS charges penalties and interest for underpayment of estimated taxes.
5. Can I get a refund if I’m self-employed?
Yes, if you overpaid estimated taxes or qualify for tax credits.
Conclusion
Self-employed individuals must report income, pay self-employment tax, and track deductions to minimize their tax bill. Proper tax planning, quarterly tax payments, and strategic deductions can reduce taxes and maximize refunds.
For expert self-employed tax planning, schedule a meeting with our CPA Anshul Goyal by clicking at https://calendly.com/anshulcpa/ now.