How do self-employed individuals handle their self-employment taxes?

Self-employed individuals are responsible for paying self-employment taxes, which include Social Security and Medicare taxes. These taxes must be accounted for in their overall tax obligations. To ensure they meet their tax liabilities, self-employed individuals typically file quarterly estimated tax payments rather than waiting until the annual tax return. This allows them to spread their tax payments throughout the year based on their income, which can be variable for those who are self-employed.

Incorporating self-employment taxes into quarterly estimated federal income taxes helps individuals manage their cash flow and stay compliant with tax regulations. When they file their annual return, they reconcile their estimated payments against their actual tax obligations. This method is essential for self-employed individuals to avoid penalties for underpayment and to ensure they are contributing adequately to the Social Security and Medicare systems.