With the gig economy flourishing, more and more people are making the most of self-employment opportunities to earn extra money. There are many people who are making a leap into full-time self-employment. However, when you start working by yourself, you might have to pay self-employment tax, which is different from other taxes.
When you are employed by a company or an individual, be it a full or part-time job, your employer withholds taxes from your paycheck. As your employer, they are responsible for withholding taxes and then paying them to the government.
On the contrary, if you are working as a self-employed individual, your clients will not be responsible for withholding taxes on your behalf. It becomes solely your responsibility to withhold and pay taxes on the income you earned from self-employment.
Does North Dakota Have a Self-Employment Tax?
Yes, North Dakota does have a self-employment tax. This is based on your earnings from any business during the financial year. Your self-employment income becomes tax-eligible the moment you receive it.
What is the Self-Employment Tax in North Dakota?
Self-employed workers in North Dakota have to file an annual tax return. As a self-employed individual, you must pay taxes on your net profit from your business. It also consists of Social Security and Medicare taxes.
While the Social Security tax is a flat rate on net self-employment income up to an annual income ceiling, the Medicare tax is a flat rate with no income ceiling. It includes an additional tax for those earning over a certain threshold.
What Does Self-Employment Tax in North Dakota Consist of?
As a self-employed individual living in North Dakota, you must pay taxes on the income you generate from your business in the state. North Dakota only collects taxes in the form of Social Security and Medicare from self-employed individuals.
Who is Considered Liable to Pay Self-Employed Tax in North Dakota?
There may be some confusion in the minds of many self-employed individuals or independent contractors if they are liable to pay self-employment taxes in North Dakota. The IRS considers you to be self-employed if you:
- Carry on a trade or business as a sole proprietor or an independent contractor.
- Are a member of a partnership that carries on a trade or business.
- Are otherwise in business for yourself (including a part-time business or a gig worker).
For instance, if you are working as a freelance or independent interior designer, you fall under the category of self-employed for taxation purposes. Note that the same rules apply to skilled professionals such as lawyers, doctors, and tutors who are running a business for themselves and not working for a designated organization.
How Much is Self-Employment Tax Rate in North Dakota?
The self-employment tax rate for 2022-2023 in North Dakota is 15.3%. This rate is the sum of a 12.4% Social Security tax and a 2.9% Medicare tax on your net earnings from self-employment. Taxpayers who work for themselves must cover the entire 15.3% of these taxes in addition to paying the normal income tax rates.
What is the Minimum Income to File Self-Employment Tax in North Dakota?
You have to pay self-employment tax in North Dakota if you are in the below categories this financial year:
- If you received $400 or more as net earnings from your self-employment job.
- The IRS considers you as self-employed if you got a 1099 form from any business you worked for during this period.
- You earned $108.28 or more from church employment.
If your income comes from any of the above categories, you must pay a fixed North Dakota self-employment tax rate. Even if your net earnings from self-employment is less than $400, you are still required to file an income tax return based on the filing requirements stated in Form 1040 and 1040-SR.
How to Calculate my Self-Employment Tax in North Dakota?
There’s a simple formula to calculate the self-employment tax you owe to the state of North Dakota. Follow these steps:
- Calculate and confirm your net earnings from self-employment by deducting your business expenses from your gross income.
- Then, multiply the number of net earnings by 92.35%. This is the amount of your income that will go as self-employment tax.
- A third step will require you to multiply this number by the 15.3% tax rate to get the exact amount of taxes that you owe to the state of North Dakota.
To calculate your self-employment tax, consider this example: Imagine you worked as a freelance developer and earned $40,000 in net income last year. To determine your taxable income for self-employment taxes, multiply it by 92.35%, resulting in $36,940. Then, multiply this taxable income by the 15.3% tax rate, giving you $5,652. This represents the amount you must pay in self-employment tax to the state of North Dakota.
What are the Tax Deductions for the Self-Employed in North Dakota?
As a self-employed individual, it is crucial to take full advantage of specific deductions that can help you minimize your income tax bill and maximize your tax return during this tax season. Self-employed individuals and independent contractors often deduct various expenses, such as home office costs and travel expenditures, as well as health insurance premiums among others.
Freelancers, contractors, and other self-employed individuals working in North Dakota can take advantage of the following common tax deductions:
- If you work from home or use a portion of your home for business purposes, you may be eligible for home office deductions.
- If you have purchased medical insurance policies for yourself, you may be eligible for a deduction on the premiums, providing financial benefits.
- You can claim deductions for “qualifying work-related education,” which includes expenses like tuition fees, books, and related costs.
- You can make tax-deductible contributions of up to $61,000 to a solo or one-participant 401(k) plan in 2022.
- Interest accumulated on business expenses can be considered as potential deductions for self-employment taxes.
- Self-employed individuals have the option to deduct a portion or the entirety of their annual cell phone or internet bill for tax purposes.
- If you are traveling for business using your car, flight, or other means of transportation, expenses incurred for travel and food can be claimed as tax deductions.
When to Pay Self-Employment Taxes in North Dakota?
No matter how busy you are while working as a self-employed individual, you must comply with the following schedule to make quarterly tax payments on your income. It applies to both the IRS and the Franchise Tax Board of North Dakota.
- 1st quarter (January 1 – March 31, 2023) payment is due on April 18, 2023.
- 2nd quarter (April 1 – May 31) payment is due on June 15, 2023.
- 3rd quarter (June 1 – August 31) payment is due on September 15, 2023.
- 4th quarter (September 1 – December 31) payment is due on January 17, 2024.
How to File Self-Employment Tax in North Dakota?
While filing your self-employment taxes, you can use Schedule SE or Form 1040 to determine the tax due on net earnings. The Social Security Administration also uses the information from Schedule SE to determine the benefits under the Social Security program.
To determine the net taxable income while filing the return, you’ll need to provide your Social Security Number or Individual Taxpayer Identification Number (ITIN).
If you have never had an SSN, you can apply for one using Form SS-5, Application for a Social Security Card. You can download the form from the Social Security Number and Card website or your nearest Social Security office. To apply for an ITIN, file Form W-7.
What Forms Do I Need to File North Dakota State Self-Employed Income Tax?
The IRS Form 1040 Schedule C is required for reporting net earnings from your business. In addition, you will have to fill out the IRS Form 1040 Schedule SE to calculate your self-employment taxes. Self-employed people can prepay their estimated taxes quarterly using Form 1040-ES vouchers.
What Happens if I Don’t Pay North Dakota Self-Employment Taxes on Time?
If you don’t make your tax payments on time, you might be charged a penalty, including both state and federal fines. At the same time, interest can be levied on every missed or late payment.
What is the Penalty Charged?
If you don’t pay your North Dakota self-employment tax on time, you could face a penalty that is issued based on percentage of money you owe.
- Penalty for failure to file: If your tax return is filed late, a penalty will apply. The penalty is usually 5% of the unpaid tax for every single month or partial month that the return is overdue. However, the IRS has set a maximum penalty of 25% (5 months) of the balance owed. In case your return is more than 60 days late, a minimum penalty will be imposed. Please note that this year, tax returns must be filed by April 18, 2023. If you still require additional time, you can request an extension until October 15. Failure to request an extension or meet the extended deadline may result in a failure to file penalty imposed by the IRS.
- Penalty for failure to pay: If you don’t pay your income taxes by the deadline, the IRS will charge a penalty. This penalty is calculated at 0.5% of the amount you owe per month, with a maximum limit of 25% of the total tax due. To avoid penalties, make sure to pay your taxes on time.
As April approaches, it’s time to start filing your self-employment tax. Make sure to review your information accurately and file your taxes on time. Understanding the basics of self-employed taxes, such as organizing your business and grasping the different tax implications, is crucial. In North Dakota, knowing the deductions you can make while filing self-employment taxes is essential. The more deductions you can itemize, the lower your taxable income will be, resulting in lower taxes.
File your federal and state taxes online with Beem. You can claim all the tax credits and deductions you are eligible for and file all forms, combinations, and filing statuses, including multi-state filing. You can also try Beem’s free Tax Calculator for a 100% accurate federal and state tax estimate.