How to Do Payroll for the Self-Employed
Learn how self-employed individuals manage their income, expenses, and tax obligations to ensure financial compliance and stability.
For self-employed individuals, managing financial obligations, including taxes, often feels different from traditional employment. While the term “payroll” typically refers to an employer paying wages to employees, for those working for themselves, it primarily involves understanding and fulfilling their own income, expense, and tax responsibilities. This includes meticulously tracking earnings and expenditures to accurately determine taxable income and ensure timely payment of various tax liabilities. Effectively handling this self-managed “payroll” is fundamental to financial health and compliance.
Identifying Your Tax Responsibilities
Self-employed individuals face specific tax obligations distinct from those of wage earners. These obligations primarily consist of self-employment tax and estimated income tax. Self-employment tax covers contributions to Social Security and Medicare, which are typically withheld from an employee’s paycheck. For self-employed individuals, this means paying both the employer and employee portions of these taxes.
The Social Security portion of the self-employment tax is 12.4% on net earnings up to an annual wage base limit, which is $176,100 for 2025. The Medicare portion is 2.9% on all net earnings, without any wage base limit. This combined self-employment tax rate totals 15.3%. This tax ensures self-employed individuals contribute to their future Social Security and Medicare benefits.
Beyond self-employment taxes, individuals must also account for federal income tax. This tax is applied to all taxable income, including earnings from self-employment, and is separate from the Social Security and Medicare contributions. Since no employer is withholding income tax from their earnings, self-employed individuals are responsible for estimating and paying this tax themselves throughout the year. State income tax obligations may also apply, requiring similar estimations and payments.
Calculating Your Estimated Tax Payments
Determining the amount of estimated tax to pay involves a detailed calculation that accounts for both self-employment tax and income tax. The process begins by accurately calculating net earnings from self-employment, which is gross income minus all allowable business expenses. This net figure forms the basis for computing self-employment tax.
To calculate the self-employment tax, 92.35% of your net earnings from self-employment are subject to the 15.3% self-employment tax rate. A deduction for one-half of the calculated self-employment tax is then taken when computing adjusted gross income for income tax purposes, effectively reducing the income subject to federal income tax.
After accounting for the self-employment tax deduction, you estimate your federal income tax liability. This requires projecting your total income for the year, including self-employment earnings and any other income sources, and then subtracting eligible deductions and credits. Tools like Schedule SE and Form 1040-ES provide worksheets to help project your overall tax liability, including both self-employment and income taxes. This estimation helps ensure you pay enough tax throughout the year to avoid penalties.
Making Your Estimated Tax Payments
Once you have calculated your estimated tax liability, the next step is to make timely payments throughout the year. The Internal Revenue Service (IRS) operates on a pay-as-you-go system, meaning taxes should be paid as income is earned. For self-employed individuals, this typically means making quarterly payments.
The standard due dates for estimated tax payments for the 2025 tax year are:
April 15, 2025, for income earned January 1 to March 31
June 16, 2025, for income earned April 1 to May 31
September 15, 2025, for income earned June 1 to August 31
January 15, 2026, for income earned September 1 to December 31
If any of these dates fall on a weekend or holiday, the deadline shifts to the next business day. Paying by these deadlines helps avoid underpayment penalties.
Several convenient methods are available for submitting estimated tax payments. The Electronic Federal Tax Payment System (EFTPS) is a free online service that allows direct payments from a bank account. Another option is IRS Direct Pay, which enables payments directly from a checking or savings account without prior registration. Alternatively, you can mail payments with payment vouchers from Form 1040-ES, or pay by credit or debit card through approved third-party processors, though these typically involve a processing fee.
Maintaining Accurate Records
Thorough record-keeping for self-employed individuals provides the necessary documentation for accurate tax calculations and compliance. Meticulously organized records allow you to substantiate all income and expenses claimed on your tax return. This practice is crucial for minimizing the risk of errors and providing support in the event of an IRS inquiry or audit.
Key records to maintain include all income documentation, such as invoices, payment receipts, and bank statements. For expenses, keep all receipts, canceled checks, and credit card statements. Specific expense categories, like business mileage, should be supported by detailed logs including dates, destinations, and purpose. It is also important to retain all tax-related documents, including previous tax returns and any correspondence from tax authorities.
Organizing records systematically, whether digitally or physically, simplifies the tax preparation process. Digital methods, such as scanning receipts and using accounting software, can offer advantages in accessibility and storage.