Understanding Self-Employment Taxes for Small Business Owners

Running your own business, freelancing, or managing a side hustle offers incredible freedom, but it also comes with unique responsibilities—especially when it comes to taxes. If you’re self-employed, you don’t have an employer withholding taxes from your paycheck, which means it’s up to you to understand how taxes work and plan accordingly.

Whether you’re a seasoned entrepreneur or just starting your small business journey, mastering self-employment taxes can save you stress and help you stay on top of your financial game. Keep reading to learn more.

What Are Self-Employment Taxes?

Besides your regular federal (and potentially state) income taxes—which you are expected to estimate and pay yourself throughout the course of the year—you’re also responsible for self-employment taxes.

Self-employment taxes are contributions to Social Security and Medicare. For traditional employees, these taxes are automatically withheld by their employer, with the employer covering half of the tax. When you’re self-employed, however, you’re responsible for BOTH portions, which totals 15.3% of your net earnings. This rate is broken down into 12.4% for Social Security and 2.9% for Medicare.

The IRS expects all of these taxes to be paid throughout the year via quarterly estimated payments.

Who Pays Self-Employment Taxes?

Anyone earning $400 or more in net income from self-employment must pay self-employment taxes. This includes freelancers, small business owners, independent contractors, and gig workers—from bloggers and photographers to personal trainers and ride-share drivers.

It’s essential to track all sources of income and expenses to determine your taxable earnings accurately. Understanding your tax obligations is critical to avoiding surprises and penalties when tax season comes around.

Planning for Quarterly Estimated Taxes

Missing your quarterly estimated tax payments throughout the year, or underpaying, can result in penalties. Therefore, it’s very important to stay on top of your tax obligations. Here are four tips for managing your quarterly tax payments:

1. Estimate Your Income: Use your previous year’s tax return as a starting point to estimate your income for the current year. Adjust as necessary based on changes in your business.
2. Calculate Your Payments: The IRS provides Form 1040-ES, which includes worksheets to help calculate your quarterly payments. Aim to pay at least 90% of your current year’s tax liability or 100% of your prior year’s liability to avoid penalties.
3. Set Aside Funds: Regularly set aside a portion of your income for taxes. A separate business savings account can help ensure you don’t accidentally spend money earmarked for taxes.
4. Stay Organized: Keep detailed records of your income and deductible expenses. This simplifies tax calculations and ensures you’re not overpaying.

Remember, quarterly estimated taxes are due on these dates each year: April 15 (Q1), June 15 (Q2), September 15 (Q3), and January 15 (Q4 of the prior year).

If you didn’t make any estimated payments for 2024, you may want to reach out to a tax professional for advice. You can also begin planning for 2025 taxes by making your first quarterly payment on April 15, 2025. Planning ahead can help you avoid surprises and keep your finances on track.

Tax Deductions for Self-Employed Individuals and Small Businesses

One of the benefits of self-employment is the ability to deduct business-related expenses, which can significantly reduce your taxable income. Common deductions include:

• Home Office Expenses: If you use part of your home exclusively for business, you may qualify for a home office deduction.
• Equipment and Supplies: Computers, software, and other tools necessary for your business are deductible.
• Travel and Transportation: Mileage for business trips or travel expenses for client meetings can be claimed.
• Marketing and Advertising: Expenses for promoting your business, such as website hosting or social media ads, are deductible.

Maximizing your deductions requires careful record-keeping. Consider using accounting software or working with a tax professional to make sure that you’re claiming all eligible expenses.

How Academy Bank Supports Small Business Owners

Managing self-employment taxes can be challenging, but you don’t have to do it alone. Academy Bank offers a range of financial tools and services designed to support small business owners and freelancers. From business checking accounts, to business loans, to treasury management services, we’re here to help you stay organized and on top of your finances.

As you plan for tax season, consider how a financial partner like Academy Bank can simplify your journey. For example, having a dedicated business bank account can make it easier to track income and expenses, while our cash management tools can help you allocate funds for quarterly tax payments.

Take Control of Your Financial Planning in 2025

Self-employment comes with its challenges, but proactive tax planning can make a significant difference. Start by understanding your tax obligations, setting aside funds regularly, and leveraging deductions to minimize your liability. With the right approach, you can turn tax season from a stressor into a manageable part of running your business. And aren’t the rewards of being your own boss totally worth it?

Visit Academy Bank to explore our small business banking solutions and see how we can support your financial success year-round. Whether you're looking for guidance or tailored solutions, our business bankers are here to help. Let us assist with managing your financial needs so you can focus on growing your business.

Let us help you focus on growing your business while we assist with managing your financial needs.