It is often the case that workers who have just started out on their own business, gone freelance or changed to contracting ignore some of the less exciting, more boring differences that come with the self-employment way of working. In addition to a fresh perspective and thrill about your own career and a new control of your career direction and possible increased financial rewards, there are equally a number of downsides to consider and financial or taxation hurdles to account for before heading out on your own.

One of those hurdles is self-employment tax. It is the social security and medicare taxes levied on self-employed individuals. You must pay this tax if you want to be eligible for benefits upon retirement.

When you are self employed, it is your responsibility to pay quarterly estimated tax payments. If you were employed your employer would do this for you, but since you get to be your own boss, you have to deal with this. You will be subject to underpayment punishments.

How can you be sure if you’re required to pay it then? Generally speaking, if you think you are self employed in any form, it ie needed to pay the SE tax, which ill depend on your net business earnings. If you usually file a Schedule C (profit and loss from a business) or a Schedule E with partnership income, then you must fill out a Schedule SE and make a payment for the SE tax. It is worth bearing in mind though that this relates to income coming from your self-employed work and earnings and not from any kind of investments - investment income isn’t subject to the SE tax. Dividends, interest, royalties and rents as well as capital gains are accordingly not taxed under the SE tax.

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