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  • Social security, Medicare and state and federal income taxes are withheld by employers on each paycheck. Self-employed people, unlike employees, instead make quarterly estimated tax payment estimates for income tax, as well as self-employment tax. The IRS requires that the quarterly estimated income tax payments are made on schedule, rather than at the end of the year using Form 1040. Estimated payments need to include payments for self-employment and federal income taxes.

    Estimate Self-Employment Tax.

    Self-employment tax is paid instead of Social Security and Medicare tax for those who are self-employed. Use IRS Schedule SE to IRS Form 1040 to calculate self-employment tax liability. You can deduct up to half of the self-employment tax payments from the federal income tax liability. This deduction will be claimed when year-end tax returns on Form 1040 are prepared.

    Estimate Federal Income Tax.

    Calculate year-end federal income tax liability when preparing the tax return Form 1040 at year end. The amount will vary according to how much the annual income will be. Often, self-employed people base the amount on the prior year's returns.

    Calculate Payments

    Calculate payments in a ratio equal to one-quarter of the amount of tax liability that you expect you may have for that particular year. It may seem like a complex method of calculation, particularly if you own and operate a business or have multiple sources of income. Because it is an estimated payment, it is expected that it could be a bit off slightly. Just remember to be reasonable and honest in the estimate amounts.

    Form 1040-ES

    Use IRS Form 1040-ES to calculate estimated tax payments. The form explains, through detailed steps, exactly how to calculate payments. Consult IRS Publication 505, Tax Withholding and Estimated Tax, for additional information. The taxable income will be the amount of income earned after calculating exclusions and deductions. If you need more explanation, seek the counsel of either an accountant or a tax attorney. Professionals will be in a better position to explain the intricate IRS details and regulations of tax law.

    Second Self-Employed Jobs

    Ensure that you pay estimated self-employment and federal income taxes on second self-employed jobs, when you are also employed by an employer. This is because the employer of your first job will only be withholding the amount of tax money owed that relates to your first job. Therefore, quarterly estimated payments will be needed to cover any additional tax liability for the earnings from your second, self-employed work.

    Source:

    IRS

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