Being self-employed means you are responsible for managing your own taxes, unlike traditional employment where income tax and payroll taxes are withheld by an employer. The IRS requires self-employed individuals to file a tax return if their net earnings—that is, income after business expenses—from self-employment are at least $400 for the year.
Understanding the $400 Threshold
The $400 rule is the baseline for filing: if your net earnings from self-employment reach or exceed $400 in the tax year, you must file a return. Net earnings are your gross income minus allowable business expenses. For example, if your freelance business earns $500 but you spend $150 on supplies, your net earnings are $350, which is under the threshold. But if expenses were only $50, net earnings would be $450, triggering a filing requirement.
Important Tax Forms for Self-Employed Tax Filing
- Schedule C (Form 1040): Reports business income and deductible expenses to determine net profit or loss.
- Schedule SE (Form 1040): Calculates self-employment tax, which combines Social Security and Medicare taxes. For 2024, the self-employment tax rate is 15.3% on the first $168,600 of net earnings (Source: IRS – Self-Employment Tax).
- Form 1040: The primary individual income tax return, where net business income and other income sources are combined.
Here is a quick comparison of tax responsibilities between employees and the self-employed:
| Feature | Employee (W-2) | Self-Employed (Freelancer) |
|---|---|---|
| Primary Tax Forms | Form W-2 | Form 1099-NEC, Schedule C, Schedule SE |
| Tax Withholding | Employer withholds taxes | No withholding; must pay taxes directly |
| Payroll (FICA) Tax | Employee pays 7.65% | Pays 15.3% (full self-employment tax) |
| Business Expenses Deductible | Usually not deductible | Deductible on Schedule C |
| Filing Threshold | Varies by income & status | $400 in net earnings |
Estimated Quarterly Taxes
Self-employed individuals also need to pay estimated taxes quarterly if they expect to owe $1,000 or more in tax for the year. These payments cover both income tax and self-employment tax, due typically on April 15, June 15, September 15, and January 15 of the following year (IRS Publication on Estimated Taxes). Failure to pay on time may result in penalties.
Common Questions:
- What if I have both a W-2 job and self-employment income? You report both on your Form 1040. The $400 threshold applies only to your self-employment income.
- Do I file if I don’t receive a Form 1099-NEC? Yes. All income must be reported regardless of receiving tax forms.
- What if my business has a loss? Filing can be beneficial to create a Net Operating Loss for future tax years.
For more detailed guidance on self-employment taxes, see our articles on Self-Employment Tax and Estimated Tax Payments.