Self-Employment Taxes 411

Image portrays self-employed Caucasian woman putting together a flower arrangement at her shop.
June 1, 2023

Self-employment taxes can confuse small business owners, independent contractors, freelancers, and those with ‘side hustles,’ all candidates for estimated quarterly taxes.

First, quarterly taxes are due to the Federal IRS and the CT Department of Revenue Services, and they are generally required if you expect to owe $400 or more in taxes for the year (roughly your net income is greater than $2,800). The due dates for these quarterly taxes are:

  • April 15th for Q1 (covers January 1 – March 31),
  • June 15th for Q2 (covers April 1 – May 31),
  • September 15th for Q3 (covers June 1 – August 31), and
  • January 15th for Q4 (covers September 1 – December 31).

How to Estimate Your Quarterly Taxes

To estimate how much you’ll make during the year and how much tax you expect to pay on those earnings, you will use Form 1040-ES or 1120-W.

The self-employment tax, which is based on net rather than gross income, is the part of your income that goes toward supporting Social Security and Medicare. If you are self-employed, you will pay the full 15.3%, unlike when you are an employee, where it’s divided between the employee and the employer. To determine if you owe self-employment tax, use an online self-employment tax calculator such as Jackson Hewitt Self Employment Tax Calculator. If the result is less than $400, you do not owe self-employment tax on this income. There is additional information available on this website. Read through what you can and contact your accountant with specific questions.

It is important to note that if you do not pay quarterly taxes or owe far more than you estimated, you will typically pay a penalty of 6% to 8% on the amount you underpaid. For example, if you make $10,000, owe $2,000 in taxes, and don’t pay quarterly taxes, you might be subject to a penalty of 6% of the $2,000 underpayment, which is $120.

If you cannot pay your taxes, you can work out a payment plan or extension with the IRS. If you’re in trouble or need help, talk with a tax professional or CPA as soon as possible and have them work out a payment plan or extension with the IRS.

Do I Also Pay Connecticut Quarterly Taxes?

As a small business owner, it is important to understand the Connecticut tax treatment of your business. An SMLLC (single-member LLC) is treated as a sole proprietorship, branch, or division of the owner, while an LLC with two or more members is treated as a partnership for Connecticut income tax purposes. LLCs treated as partnerships or S corporations for federal income tax purposes that have income derived from or connected with Connecticut sources must file Form CT-1065/CT-1120SI.

A partner of a Limited Liability Partnership, or LLP, is generally not liable for any debts or obligations of the partnership or another partner or partners. A limited liability partnership with income derived from or connected with Connecticut sources must file Form CT-1065/CT-1120SI.

Lastly, family members may operate a business together. For example, a husband and wife may be partners or run a joint venture. If you operate a business together as partners, you should each report a share of the business profits as net earnings on separate self-employment returns (Schedule SE). This is the case even if you file a joint income tax return.

If you are self-employed or make money from various sources, working with a tax professional can save you time, reduce stress, and possibly lead to additional tax breaks of which you would have been unaware.

Please note we are not accountants and do not provide tax advice. Contact the IRS directly, or speak with your accountant to obtain answers to your questions. The IRS can be reached toll-free at 800-772-1213 or at the TTY number 1-800-325-0778 if hearing impaired. Representatives are available from 8:00 a.m. to 7:00 p.m. Monday through Friday. Quicker access is available earlier in the day, later in the week, and later in the month.

Links to the forms discussed in this blog: