More people are becoming self-employed and joining the gig economy. About 30% of jobs are held by self-employed people.
If you decided to take the leap in the last year, you’re going to have to file self-employment taxes. The tax code can be confusing for basic taxpayers.
It can be downright daunting for self-employed people. Your tax responsibilities tend to be much more, and you need to make sure you get it right. Mistakes can result in penalties and interest on your tax bill.
Would you like to know how to file self-employment taxes the right way? Keep reading to learn more about your tax responsibilities as a self-employed person and how to file your taxes.
There are different thresholds that determine whether or not you have to pay taxes. For example, a single filer who earned less than $12,000 in gross income doesn’t have to file taxes.
Before you click away from this article thinking that you don’t need to file a return this year, you need to know that the threshold changes for the self-employed.
If you earn more than $400 for the year, you need to file taxes. That doesn’t necessarily mean that you need to pay taxes. You do have to file a return with the IRS.
Have you ever looked at a pay stub from a previous job? You’ll notice a lot of tax withholding codes, such as FICA. This for Social Security and Medicare contributions. In a traditional employment scenario, you pay 6.2% for Social Security and 1.45% for Medicare. Your employer matches that payment for the second half of that contribution.
That’s not the case for the self-employed. You’re responsible for paying both halves of Social Security and Medicare taxes, for a total of 15.3% of your profit.
On top of the 15.3% of self-employment taxes, you also have to pay federal income taxes, as well as state and local taxes.
It may feel like all of your hard work is going to taxes and you pay more taxes than you should. When you learn how to file your taxes, you’ll quickly realize that there are also tax benefits to being self-employed.
There is a bit of a process to file self-employment taxes. Follow these steps and you’ll be able to file with very few headaches.
Before you start doing your taxes, you have to be organized. You’ll want to make sure that you have all of your paperwork in front of you.
That includes forms that are mailed to you, like 1099-MISC forms, and any forms that show you paid student loan interest. You’ll also need your business receipts and bank statements.
If you got health insurance through the Healthcare Marketplace, you’ll need Form 1095-A.
The easiest step in the process is to calculate your gross income for the year.
You’ll need to include all of your income, whether you received a 1099-MISC for the work or not.
Remember that when you file self-employment taxes, deductions are your friends. Deducting your income can lower your adjusted gross income, which can lower your tax bill. It can get confusing for self-employed workers because you have business deductions and personal tax credits, too.
You’ll put your business deductions on Form Schedule C. On your 1040 form, there are additional tax credits that you can claim as well.
The most important thing about taking deductions is that you have to have documentation and a legitimate business reason to deduct the expense.
You can’t deduct a cup of coffee that you had the other day if there was no business use for it. With self-employment, the lines between business and personal can easily get blurred. You need t make sure that you ask yourself this question any time you want to deduct taxes.
If you’re not sure if an expense qualifies as a legitimate write off, then ask a tax professional. That will protect you and your business down the road if you’re ever audited.
These are some of the most common deductions you can take.
The home office deduction can be a huge help in lowering your tax bill. The problem with this is that not everyone qualifies for this deduction.
You have to use a portion of your home for business use only. Using a space as a playroom and an office doesn’t count.
If you do qualify, you can deduct a percentage of your utilities, rent or mortgage, insurance, and repairs and maintenance costs. For example, if you have a 1000 square foot home and you use 100 square feet for business purposes, you can deduct 10% of your expenses.
With the passage of the Tax Cuts and Jobs Act of 2017, one of the many changes to the tax code included a new deduction for small businesses and self-employed workers.
You can deduct as much as 20% of your business profit from your income taxes. If you had a net profit of $50,000 for the year, you can deduct up to $10,000.
As a self-employed person, you likely got health insurance through the Healthcare Marketplace. You have some additional work to do on your taxes.
When you first apply for health insurance, you’re asked to predict your income for the year. That can be hard to do. The tax credit that is applied towards your premium is based on your predicted income.
You have to reconcile your income with the tax credit received. If you made more than you initially projected, you’re likely going to have to pay a portion of that tax credit back.
On the other hand, if you made less than you projected, you may get a refund.
Once you fill out your 1040 and Schedule C, you’ll be ready to file your federal taxes. Depending on where you live, you may have to deal with state and local taxes, too.
Some states like Pennsylvania has a flat income tax, while New Jersey has a progressive tax system. With a progressive system, the percentage you pay goes up with your income. There are 9 states that don’t have an income tax.
The first year in filing self-employment taxes may feel like a double-gut punch. The reason why is because you have to pay your tax bill for the previous year.
If you’re likely to owe more than $1000 in taxes in the next year, you have to pay estimated taxes, too. It can be a bit of a shock to tax filers.
Yes, you must pay the first quarter estimated tax payment at the same time as your annual taxes. Since this is your first year filing as self-employed, and you didn’t pay estimated taxes during your first year, you’ll be hit with a big tax bill.
Moving forward, how can you determine how much you should pay in estimated taxes? You can take what owed in taxes the previous year and divide by four. That will be your estimated tax payment amount for each quarter.
Of course, self-employment income is unpredictable. One year, you’re down and the next you’re up. If your income increases more than the previous year, you’re going to have to pay more taxes.
You should set up a system where you create a savings account just for tax savings. Every time you get paid, you should set aside a certain percentage of funds and transfer the funds right into savings.
That will ensure that you have plenty of money to handle your tax obligation. There are a number of factors that determine how much you should set aside. You should consult with a tax professional to figure out that number.
What happens if you can’t pay your taxes in full because your tax bill was more than expected? You certainly don’t want to miss the tax deadline because of it.
What you can do is contact the IRS to go on an installment plan. That ensures that you pay your taxes and pay your tax bill in monthly installments. The IRS does charge a setup fee for this and you will have to pay additional interest and penalties.
Becoming self-employed can be a dream come true. You can work when you want and sometimes from where you want. There is a small price to pay for that freedom, though.
You have to take care of self-employment taxes. It can be very intimidating unless you know how to file self-employment taxes. You need to be organized and understand the different tax laws and codes. That’s a challenge because they’re always changing.
You don’t want to leave things to chance. After all, you don’t know what you don’t know. Hire tax professionals that can take care of your taxes for you. Learn more about our tax preparation services today.
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