Is the Difference Between Quarterly Estimated Taxes and Self-employment Taxes?

You must file your taxes on time and pay your own taxes if you are a gig worker or are self-employed. You thus have certain tax liabilities that are not applicable to regular workers. However, precisely what are these taxes and how do they vary from one another?

Taxes on Self-Employment: What Are They?

The taxes paid by independent contractors to support Social Security and Medicare are known as self-employment taxes. When you are an employee of a business, your employer deducts Social Security and Medicare taxes from your compensation. You must pay both parts of these taxes because, while working for yourself, you are both the employee and the employer. However, there are programs that offer tax reduction, which could be really useful for people who are self employed.

At this time, the self-employment tax rate is set at 15.3% of your net income. Along with Medicare, 2.9% of this is allocated to Social Security, or 12.4%. Only the first $142,800 of your salary in 2021 is subject to Social Security taxes, however. You will continue to owe Medicare taxes on all of your income even after you are exempt from Social Security taxes.

How Do Quarterly Estimated Taxes Work?

Self-employed people who have a tax due throughout the year make quarterly anticipated tax payments to offset those payments. You do not have taxes deducted from each paycheck as an employee would since you are not an employee. Taxes on your income must however still be paid. Four times a year—on the 15th of April, the 15th of June, the 15th of September, and the 15th of January—estimated quarterly taxes are due.

By projecting your income and deductions for the year, you’ll be able to calculate your estimated tax liability at the time you make these payments. Your estimated tax burden for that quarter will then be paid to the IRS. When you submit your tax return, penalty and interest costs may apply if you don’t make these payments. Use a quarterly tax estimator for this.

Are self-employment taxes the same as quarterly estimated taxes?

The two terms are not interchangeable; quarterly estimated taxes are not self-employment taxes. In order to pay for Social Security and Medicare, you must pay self-employment taxes on your net income.

Despite being distinct, the two tax categories are still connected. Your self-employment tax burden is somewhat reduced when you make quarterly anticipated tax payments. By doing this, you may prevent underpayment penalties as well as a hefty tax bill at the end of the year.

What Are the Best Ways for Freelancers to Save the Most Tax?

Maximizing tax savings is one of the most difficult tasks that freelancers must do. Freelancers lack access to health insurance and retirement plans offered by their employers, in contrast to typical workers. There are still strategies to lower your taxable income and cut your tax bill, however. To optimize your tax savings as a freelancer, consider the following advice:

1. Benefit from tax deductions – According to the IRS, self-employed people are entitled to a deduction for a number of business-related expenditures, including rent for a home office, business travel, and equipment costs.

2. Contribute to a retirement account – Although freelancers cannot contribute to employer-sponsored retirement plans, they may still make contributions to their own IRA or solo 401(k) accounts. You may lower your taxable income and minimize your tax liability by making contributions to these accounts, which are tax deductible.

3. Maintain correct records – As a freelancer, you’ll need to maintain thorough records of your earnings and outgoings all year long. The IRS won’t get involved, and you’ll be able to maximize your deductions by doing this.

4. Consult a tax expert – Freelancer taxes may be challenging, therefore reach out to a tax expert who can help you with it and point out any prospects for tax savings.

And That’s It

You must pay quarterly estimated taxes as well as self-employment taxes if you work as a freelancer or are otherwise self-employed. These taxes may be a substantial portion of your entire tax obligation even though they are distinct but connected levies. You may lower your tax burden and retain more of the money you make by being aware of these taxes and using all of your tax-saving alternatives.