The IRS charges penalties to business owners who do not pay their self-employment taxes on time. Self-employment taxes are payments to Social Security and Medicare funds that are due on income earned by self-employed individuals. In a conventional work arrangement, the employee pays half of the tax due and the employer the other half. Self-employed individuals are both employers and employees, so they are responsible for paying the entire amount.
If you do not pay your self-employment tax by April 15 of the year following the tax year, you are liable for a penalty of 2.66 percent of the total amount you owe. Calculate this penalty first by figuring your self-employment tax, which is equal to 15.3 percent of your net business income up to $106,800, and then multiplying the amount of tax you owe by .0266.
Payments Made Before April 15
If you pay your self-employment tax late, but earlier than April 15 of the year following the tax year, you will owe a smaller self-employment tax penalty than if you paid on or after April 15. Count the number of days before April 15 that you made your payment. Multiply the number of days by .00011. Subtract this amount from the original amount of your penalty.
The amount of your self-employment tax penalty is subject to the consideration that you have accrued the penalty over the course of the year. In addition, seasonal businesses earn a disproportionate amount of their incomes during selected months, so they owe more for their busy quarters than for their slower periods. You may adjust your self-employment tax penalty to reflect these factors by completing the worksheet on IRS Form 2210, which allows you to divide your income by quarters, and calculate the percentage of the total penalty that you owe for that period.
If you are married and filing jointly, and your spouse arranges his deductions to cover your self-employment tax, you may not owe penalties even if you do not send in your own estimated tax payments.
- IRS: Form 2210
- IRS: Self-Employment Tax
- Internal Revenue Service. "Self-Employment Tax (Social Security and Medicare Taxes)." Accessed Jan. 28, 2020.
- Internal Revenue Service. "About Schedule SE (Form 1040), Self-Employment Tax." Accessed Jan. 28, 2020.
- Internal Revenue Service. "Who Is Self-Employed?" Accessed Jan. 28, 2020.
- Internal Revenue Service. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed March 14, 2020.
- Internal Revenue Service. "Questions and Answers for the Additional Medicare Tax." Accessed Jan. 28, 2020.
- Internal Revenue Service. "Topic No. 554 Self-Employment Tax." Accessed March 14, 2020.
- U.S. Senate Committee on Finance. "DIVISION A – KEEPING WORKERS PAID AND EMPLOYED, HEALTH CARE SYSTEM ENHANCEMENTS, AND ECONOMIC STABILIZATION: Section 2302. Delay of payment of employer payroll taxes." Accessed March 30, 2020.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.