Final answer:
Self-employed individuals deduct business expenses on Schedule C (Form 1040 or 1040-SR). They also pay self-employment tax which includes Social Security and Medicare taxes, requiring them to make quarterly estimated tax payments if they owe $1,000 or more in taxes.
Step-by-step explanation:
Self-employed individuals, including those who are part of the so-called 1099 or gig economy, deduct business expenses on Schedule C (Form 1040 or 1040-SR), Profit or Loss from Business. This form is used to report income or loss from a business operated or a profession practiced as a sole proprietor.
On Schedule C, self-employed individuals list all business-related expenses such as advertising, car and truck expenses, rent or lease, utilities, and more, which are then subtracted from the gross income to determine the net profit or loss of the business.
When it comes to taxes, self-employed people must also contend with the self-employment tax, which consists of both the employer and employee portions of Social Security and Medicare taxes. The total self-employment tax rate is 15.3% (12.4% for Social Security up to the income cap, and 2.9% for Medicare with no cap). This is documented on Schedule SE (Form 1040).
Moreover, since self-employed individuals do not have taxes withheld from their income by an employer, they generally need to make quarterly estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. The importance of accurate record-keeping and staying up-to-date with tax obligations is essential for independent contractors and freelancers to avoid penalties and optimize their tax situation.