Self-employment income is deceptive. That’s because it is income that has not had taxes paid on it to the IRS in advance. This applies to gig economy income, sole proprietorships, and any 1099-MISC income. Since no taxes paid, it seems like way more than it is. Plus, in addition to income tax, social security and medicare taxes are also owed. Say what?
Social Security and Medicare amount to 15.3% tax (for income up to $132,900.) If you are employed and paid on a W-2, the employer pays half of it. However, if you are self-employed you owe all of it. Yes, the entire 15.3% plus whatever your income tax is.
You can get some of it back via self-employment tax and health insurance deductions, Earned Income Tax Credit, and the Qualified Business Income Deduction. Yes, it’s confusing.
This gets even more complicated if you have a home office or drive for a rideshare or delivery service. Then you have to track office expenses, home expenses, and depreciation and mileage for the car.
Some advice, and I prepare taxes at H&R Block:
If you receive self-employment income, put whatever percentage you will need for taxes in a savings account. Then make quarterly payments in advance at irs.gov. That way taxes will be paid, just like what happens with W-2 income, as you get it, and not all at once on April 15.
Sometimes you can request that 1099 income have taxes taken out and paid in advance. The amount of taxes paid will appear on the 1099-MISC you receive.
Self-employment income can get complicated on tax returns. Unless you really know what you are doing, have your taxes done at H&R Block or similar tax prep service.
Ahem. If you got a 1099-MISC, the IRS got it too. They know about the income. And the IRS also has computer programs that check returns for silly high business expenses and deductions. So, yeah, honesty is the best policy. Really, it is!
Contact me if you have questions.