6 min read
This story originally appeared on MarketBeat
I recently started my own business. (Yes, by choice, not by necessity, although many might question my judgment.)
Like me, have you just made the jump to hold on to your shorts? If so, you probably want to know as much as you can about self-employment tax. (And resist my initial urge to take a nap – if you can.)
Let's go over the basics, although it's a great idea to get in touch with your accountant so you understand your overall tax picture and what self-employment tax means to you. If you understand self-employment tax, you can definitely prepare for your June quarterly tax estimate.
Definition of self-employment tax
Seems pretty easy right? The self-employment tax includes taxes that you have to pay as a self-employed person.
It's a bit deeper than what you can imagine. Individuals who work for themselves must pay Social Security and Medicare taxes, just like you would if you worked for an employer. This works similarly to when Social Security and Medicare taxes are withheld from the wages of most wage earners.
Who else fits into the self-employed category? The IRS puts you in this category if you work as a sole trader or independent contractor in a trade or company. You also fall into this category as a member of a partnership or you are in the business yourself, and that includes part-time business.
What is the tax rate for the self-employed?
In short, the self-employed tax rate is 15.3%. This equates to an overall percentage of 12.4% for Social Security and 2.9% for Medicare taxes.
Seems awfully high, doesn't it? Yes, it might seem so, especially if you're an independent contractor scratching for every penny. But focus on the positives: you only pay self-employment tax on net income.
What does that mean? This means that you must first take any deductions, such as: B. Business expenses, can be deducted from your gross income. In addition, you can claim 50% of your self-employment tax as an income tax deduction. For example, let's say you pay $ 2,000 in self-employment tax. This payment reduces your taxable income by $ 1,000 and can save you big bucks on your income taxes.
How to file taxes on self-employment
Follow these steps to file self-employment taxes each year.
Step 1: Tax Quarterly.
As a self-employed person, the IRS recommends that you file an annual tax return and pay the estimated tax quarterly.
Step 2: know your forms.
You determine your self-employment tax (SE tax) using Schedule SE (Form 1040 or 1040-SR). If you've had a job in the past, you know that your employer sets your Social Security and Medicare taxes on most wage earners, so you may never have had to do this before.
You may need to fill out other self-employment tax forms such as Schedule C or Schedule C-EZ to report any income or losses.
Step 3: calculate your income and expenses.
Your income and expenses include understanding how much you've made. This requires careful addition. You'll also want to add up your expenses – the amount of money you've spent in your business. You can act as a contractor and fill out 1099 forms for each company you work for. Other people you work with may only accept invoices from you.
Step 4: Determine if you need to fill out an information return.
Self-employed or small businesses that make payments may need to file an information statement. However, you may want to take a look at the qualifying information for these items, which are very specific. Information returns include payments such as services provided by independent contractors, awards and accolades, rent, royalties, withholding taxes, crew members of your fishing boat (see how specific is it?) To doctors for buying fish from people who are in or out of trade Business in catching fish, income from crop insurance and others.
Information returns can also include interest on corporate debt, dividends to a corporate shareholder, dividends from a retirement plan, or payments to merchants such as third-party network transactions.
Payments can include mortgage interest, property sales, covered securities, debt relief, and direct sales of consumer goods.
Step 5: contact an accountant.
You can also bypass all other steps and jump straight to that step. You may already be feeling discouraged with the myriad of types of forms and deduction options, and you may want your accountant to do it all for you or for him or her to review your prepared documents before filing them for quarterly taxes.
Ways to Save Taxes
You want to be aware of every single thing you pay for in order to allow your taxes to be written off.
Start-up costs: Whatever it is you need to start your business, whether it's securing space, marketing, advertising, or hiring a copyright attorney – whatever it is, you should be able to pull it off.
Mileage: When you travel for work, you can deduct the mileage and vehicle costs, e.g. B. A new rear view camera that you received for shipping items for your business.
Home office: Don't forget to subtract the square footage of your home office if you spend time in this room to work.
Supplies and equipment: Did you buy a new laptop? A printer? Computer paper? You can deduct every little thing you buy for your home office. Keep your receipts!
Your accountant (or good tax software that you use year round) can help you identify any deductions if they hit your desk. It can also store your information from year to year so you can easily identify items that you can pull off each year.
Find out about taxes on self-employment
The more you know about your taxes as a self-employed person, the more you will realize how much you need to learn about self-employment taxes. (I know I feel this way!)
Tax rules apply to you even if you are on Social Security or receiving Medicare. So it pays to learn them in the long term now.
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