Starting your own business as a sole proprietorship or freelancer can be intimidating. Not knowing how much money you will make regularly or how to pay for the costs of doing business let alone taxes can add more stress to our already stressful lives. Here are some of the basic facts about taxes for freelance workers and sole proprietors.

If you provide a service for customers you will likely need to fill out a form W-9 for each customer/client. Any customer that pays you more than $600 in compensation for services is required to issue you a 1099-Misc. There are some limited exceptions and a different set of rules for other non-services payments. Generally speaking, the sum of all the 1099s you receive plus your income from smaller clients who don’t issue you 1099s is your total revenue for the year.

Just like businesses, sole proprietors are taxed on every dollar of income they earn less expenses. If you own a sole proprietorship, the IRS considers that a pass-through entity. As mentioned above, your income will be reported on Form 1099s instead of W-2s. You will report your income from your sole proprietorship business on a Schedule C—a completely separate part of your Form 1040 tax return.

As a sole proprietorship, you are actually taxed on your profits, not your total revenues. That means that your expenses are important since they decrease your taxable income. Examples of expenses could include insurance, rent, office supplies, business travel costs, etc. What is or isn’t a deductible business expenses probably deserves a whole post on its own. In any case, total revenues less total expenses equals net income on your schedule C.

This net income from your Schedule C is taxed in a couple different ways. It is subject to income tax and self-employment taxes. Let’s review self-employment taxes first.

As an employee, you not only pay income taxes, but you also pay taxes to Social Security and Medicare. You must still make these contributions as a sole proprietorship or freelancer as well. These charges are known as “self-employment taxes.” They are separate from your income tax obligations, but they are included on your income tax return. The self-employment tax rate is 15.3%. Of that, 12.4% is usually for Social Security and the other 2.9% will go to Medicare.

Employees pay about half as much as sole proprietorships to these programs because the employer will also pay half as well. However, self-employed individuals also get a tax deduction for about half of their self-employment taxes. That way, there is no “penalty” associated with being self-employed. Self-employment taxes are reported on Schedule SE, which is filed in combination with your regular income tax return.

Again, as a W-2 employee generally you have federal and state income tax withholding on each paycheck. When you own your own business, there is no one taking out taxes on a regular basis on your behalf. You are obligated to do this on your own by paying estimated taxes. One of the most common ways that sole proprietorships and freelancers get tripped up at tax time is by failing to pay their estimated tax payments throughout the year. This process involves estimating how much income you have at the end of the year and paying taxes related to that amount.

Sole proprietorships and freelancers must pay taxes four times per year (quarterly). If you are expected to owe at least $1,000 in taxes for the year, you should make estimated tax payments. Your state may also require that you make estimated tax payments as well. Estimated tax payments are due on the fifteenth day of the fourth, sixth, and ninth months of the current fiscal year and the fifteenth day of the first month of the following year.