Self-Employed Taxes for Dummies- A Foolproof Compliance Guide
Taxes are never easy, but they’re especially difficult when you’re self-employed. That’s why it’s so important to have a solid understanding of the tax rules that apply to you. In this guide, we will outline the most common taxes you may face as a self-employed person and provide you with tips on how to comply with them. Whether you need to file your taxes on your own or take advantage of professional help, this guide has everything you need to get started.
There is no denying the fact that most people ‘cringe’ when it comes to getting their taxes in order. The very mention of the word ‘tax’ can spell hassle to most customers and clients. But there is no escaping the taxes for anyone, as it is one of the most vital aspects for all businesses, big or small. The reason why the taxes are tricky is that there is unique taxation for every ‘tax situation’. Tax calculations can get crazy for a lot of people, however, it is essential that every business owner needs to be aware of the tax liabilities that can assist them in the future. While the taxes and their calculation can be a task, with a few guidelines to help you out, this can be a breeze.
Here are a few aspects of self-employment taxes in simple terms.
The 1099 Independent Contractor
Many self-employed workers are categorized as Independent contractors by the IRS. This refers to the business arrangement that does not comprise a ‘full operation’. Instead, it is more of a ‘one-man show’. Freelancers, Graphic Designers, and writers usually fall into this category. Also, this applies to people who work in the shared economy. The other examples of Independent Contractors comprise listing your vehicle on Turo, driving for Uber, hosting on Airbnb, and using Upwork for finding freelance work. The best part about the Independent contractor is that one gets to set their fee, time and schedule. Also, one is responsible for the tax calculation and remitting the taxes as well, as you do not have a set-up where an employer is withholding and remitting the taxes on your behalf. This is where the 1099 forms come into play, as most self-employed contractors make use of them.
Read More-: Process for Filing 1099s and 1096s in Sage 50
All About the 1099 Forms
One might have come across this term many times over as 1099 forms have often been mentioned. Essentially this is a document that is used to report income. Interestingly there are various forms of 1099. Most commonly, the 1099 K and 1099 MISC are used. These are issued by businesses to report income for independent contractors.
The 1099 K Forms
This is the 1099-type form that is generally issued by a third-party site like Turo, Airbnb, Uber and Upwork. The payments are facilitated by these companies for the services offered by you. However, one needs to bear in mind that 1099 K will be issued only if the individual reaches 200 transactions with a revenue of over 20 K. Also, any fees charged by the 3rd party are subtracted from the total income.
The 1099 MISC
This form is issued by the businesses to the contractors when they are paid more than $600 for one year. This form type can be issued by businesses and individuals alike. For instance, if you work as a freelance graphic designer and earn a total revenue of $1200 for the year, then you are entitled to receive a 1099 MISC. The same applies to businesses as well; where if you pay a contractor $600 in a year, you need to issue the 1099 MISC forms.
In the case of 1099s, it is important to ensure that you accurately report your income. Likewise, the same 1099 form is also received by the IRS to cross-reference the income reported by you. Hence it is important to ensure that you are rather honest with your reporting.
The Self-Employed Taxes for 1099 Contractors
As mentioned earlier the self-employed or independent working contractors are entitled to the self-employed tax responsibilities that you should be aware of. In case one is unable to remit the right kind of taxes at the right time, can lead to penalties and payment of interest to the IRS.
The Estimated Taxes
The estimated taxes are paid by self-employed earners. In case you do not have an employer then you do not have anyone withholding the taxes from your total income throughout the year. Pointedly, the IRS wishes to collect the taxes soon enough and hence, prompt tax payments are expected immediately.
But, the main question arises, that one needs to know how much-estimated tax you owe. Do you owe more than $1000 in taxes? Hence, it is important to make the estimated tax payments. Hence, it is expected by the IRS to pay the estimated taxes every quarter
The Quarterly Taxes and when are they Due?
The Quarterly taxes are also known as the Estimated tax payments and are due each quarter. The payments are due on April 15, June 15, Sept 15, and January 15. In case the date of the 15th falls on a holiday or a weekend, then the due date will fall the next business day.
To pay the taxes when the income is yet to arrive
- Is to calculate the estimated taxes according to the taxes paid the previous year.
- Now, divide the total by 4.
One of the best ways to pay your taxes online is to do so online. This can be done easily over the IRS website and use the convenient platform for swift tax payments on time, online, anytime.
Filing of Taxes by the Self Employed
When it comes to the filing of taxes, it is not as simple as it is for W2 employees. For this, it is important to pay close attention to the tax deductions and the various sources of income. When it comes to preparing self-employment taxes, one needs to fill out Schedule C.
What is IRS Schedule C?
This is used to report a loss or income from the business operated by you. This is the form where you are required to fill out the income earned by your business, along with the deductible expenses. To effectively complete the Schedule C form, you need to get all the details and information at the right place concerning your business. This includes the name of the business along with the nature of the business.
Likewise one needs to provide the tax ID number or social security in case you do not have the tax ID number. To complete Schedule C, one needs to calculate the business income. This comprises the income inclusive of services, recipients, returns and allowances, tax credits and refunds. Also, one needs to state the business expenses, which are deductible expenses that can be leveraged against the taxable income to lower the tax bill on the whole. Thus, it is your net income that you are left with and what you need to report in your 1040.
The Self-Employment Tax Deductions
These are the taxes that are vital for self-employed taxes as these can lower the tax liability by a huge margin. Here, it is important to know which tax deductions apply to the business. A few of the general tax deductions for self-employment comprise:
- The Business Insurance
There are certain business-related insurance premiums which include liability insurance or commercial vehicle insurance. Here the required insurance policy qualifies, hence only those policies qualify that are required to protect your business.
- The Internet and Cell Phones
Almost all businesses require a secured cell service and a smooth internet connection. Hence, according to the IRS, you can deduct the business part of the cell phone and internet connection.
- The Continued Education
There are times when you need to spend money for further career and education to benefit your business and the tax situation as well. Here, the individual is eligible to deduct the cost of further education as long as it is related to the business. This comprises the cost to attend a certain course, a seminar, travelling to and fro the classes, and also the supplies for the classes.
- The Health Insurance Premium
There are cases when self-employed business persons are entitled to deduct the cost of their health insurance. This is inclusive of dental, and also long-term care premiums. In this case, one can write off the premiums for your partner/spouse, and other qualified dependents.
- The Home Office Tax Deduction
This feature allows the individual to deduct the $5 per square foot, for up to 300 square feet only for the home office spaces. Here, one needs to take note that this is an exclusive feature for your business. Hence, the best part is that this can also be the corner of your home or even a kitchen counter, as long as it is related to your business.
- The Travels
Some businesses comprise individual travelling. Hence one can easily deduct the cost that comprises the travelling expenses. This feature is inclusive of vehicle rental expenses, hotel accommodations, airfare, and various other expenses related to travelling.
- The Meals
The great news is that the meals related to the business are also eligible for a tax deduction. This includes meeting up with clients for coffee or meals or having the meals expenses while travelling for the businesses as well. Here, the cost of the meal is deductible for up to 50%. Here keep in mind that this does not include the meal you have alone or at your office space.
- The Self-Employed Taxes
This is for the individuals who fall under the self-employment category, hence you owe the self-employment taxes. Here this is applicable for both the employer and the employee part of the social security and medicare taxes amounting to 15.3%. This refers to the fact that almost half of the self-employed taxes fall under the tax-deductible category, mainly because this is the employer’s part of your tax obligations.
- The Tax Deduction Worksheets
This is a worksheet that will ensure that you do not leave any money behind. Hence this worksheet allows the individual to know which tax deductions apply to your business. This worksheet is vital to ensure you rightfully fill out your Schedule C.
So there you have it, people, these are the various facts, features and aspects of self-employed taxes for beginners. However, in case you have any more concerns about the same, be free to reach out to us and our team of experts will assist you.
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Frequently Asked Questions(FAQs)
What is meant by Estimated Taxes for wage Earners?
To start with, this is the most avoided tax type by most individuals. The best part is that the W2 workers can easily avoid paying the estimated taxes in case they are gainfully employed. As for the regular wage earners, their paychecks withholdings can be withheld, cover their estimated tax payment. With the help of this practice, the estimated taxes can easily be covered with these additional withholdings.
How does one File Jointly with a W2 Earner?
It is advised for married couples to take into account the best filing options for them. However, keep in mind that both you and your spouse can file either separately or jointly. In the case of filing jointly, this greatly reduces the year-end tax burden, nevertheless, this might not be the best option always.
How does one Leverage the Deductions With Income?
The IRS has the power to limit the amount of some of the deductions one can consider based on income limits. For instance, certain taxpayers can deduct medical expenses that exceed more than 7.5% of their income. Hence, higher-income earners are entitled to smaller write-offs for such deductions.
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