Self-Employed? Your IRS Risk Factors

Self-employment creates tax traps that catch thousands every year. Estimated payments, self-employment tax, record-keeping, and audit risk. Here is how to handle them.

By Darrin T. Mish, Attorney

The Tax Surprise

Self-employment tax is 15.3% on top of income tax. Combined effective rates easily exceed 40%. Without employer withholding, the full burden hits at filing time. Many freelancers and gig workers owe $10,000 or more in their first year of self-employment.

Prevention

Make quarterly estimated payments. Keep records. Separate personal and business finances. Consider S-Corp election when income exceeds $50,000-$60,000 to reduce self-employment tax. Set aside 30% of every payment for taxes.

Self-employment is the most tax-advantaged way to earn income. But only if you plan for the taxes.

This guide is general information about federal tax law as of its publication date, not legal advice for your situation.