Self-Employed
Tax Guide (2023)

Being a soloprenuer can be incredibly rewarding, but there can be a lot to learn;  especially when it comes to taxes. If you are afraid to make a costly tax mistake, or simply wish you knew more about how the system works, you are not alone.

We’re here to help. We’ve answered the most common questions we hear about paying taxes as a solopreneur.

What taxes will I pay as a self-employed solopreneur?

As a self employed worker you will pay Federal, State income tax along with Self-employment tax. 

Federal & State income tax will vary by where you live,  your total income and how many deductions & credits you have.

Self-employment tax rate is a flat 15.3% on all your business net income. This includes 12.4% for Social Security tax and 2.9% for Medicare tax. This percentage might seem higher than you remember it being as a W-2 employee. That’s because as a self-employed person, you are responsible for the tax obligations of both employer and employee. Lucky you!

While what you actually owe can vary a lot from person to person, the best practice is to save about 30% of your self-employed income to pay for taxes. (If you’re looking to automate this, check out Ruby Money).
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When do I have to pay taxes?

If you are self-employed and anticipate owing at least $1,000 in taxes over the course of the year, the IRS requires you to pay estimated taxes each quarter. If you don’t pay quarterly taxes, you may incur penalties from the IRS. These penalties can add up especially as your earnings rise. The reason the IRS wants you to make estimated payments is to prevent business owners from being surprised with a huge surprise tax bill at the end of the year they they can't afford.

Quarterly estimated taxes are due 4 times a year roughly around the 15th of reach of the following months: 
- Jan 15th
- April 15th
- June 15th
- September 15th
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When you are self-employed estimating what you will owe for the year can be tricky. Your income can fluctuate significantly from year to year. Here are 3 ways you can get a good estimate.

1. Pay 25% of your tax bill last year.  (This works best if you expect to earn about the same amount this year). This is called the safe harbour rule and won't protect you from having a surprise tax bill.
2. Use the IRS Form 1040 ES estimated tax worksheet to calculate an estimate or ask your CPA to do this for you.
3. Use the Ruby Money app. Our app keeps track of your income and expenses and calculates your estimated payments each quarter.

How can I lower my taxes?

Paying 30-50% of your hard won profits to Uncle Sam can be frustrating. But the good news is there are a number of strategies you can engage to legally lower your taxes and increase take-home profit.

Many of the expenses you incur to run your business are likely to be deemed deductible, as long as they are “ordinary and necessary.” This means things that would be seen as normal in your line of work to spend money on. 

Download this cheatsheet of common soloprenuer deductions.

The more you are able to track expenses, the easier they will be to document and deduct. We recommend keeping a spreadsheet, a book keeping tool or using a tax app like Ruby Money to keep track of your deductions.

In addition, putting money in a qualified retirement account such as a SEP-IRA can also lower your taxes. You can contribute up to 20% of your net income (up to $64,000 in 2023) up until tax deadline the following year. SEP-IRA’s are a powerful tool as they both help you save for the future while lowering tax deductions.
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What’s the best way to stay on top of taxes?

Taxes can seem like one more thing to stress out about as a solopreneur, but with a little bit of planning and the help of tools like Ruby Money you can get your taxes under control and get back to focusing on what you love.

To stay on top of taxes: 

• Get a estimate your tax rate (use the calculator above) and make sure you are charging enough to cover this.
• Set funds for taxes aside each time you get paid (in a separate bank account), and make sure to pay estimated taxes each quarter.
• Track your business expenses and take advantage of tax-free retirement programs to lower your taxes. 

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