When an individual works for themselves, he or she is considered self-employed for taxes, which means the individual is responsible for paying and filing taxes on a scheduled basis. These individuals will have some advantages and disadvantages at tax time.
Five Tips For Self-Employed Taxpayers
- A self-employed individual will have to pay income and self-employment tax. The self-employment tax includes Social Security and Medicare taxes. Normally these taxes are withheld from an individual’s wages, but a self-employed individual will have to pay these taxes by filing a Form 1040 Schedule SE. However, the individual does get to deduct half of this tax from his or her income on Form 1040.
- The earnings will need to be reported on a Schedule C or C-EZ Tax Form. This form will show whether an individual made money from a business or had a loss from the business. It will be used in addition to the Form 1040 and Schedule SE.
- Sometimes, a self-employed person will have to make estimated tax payments during the year. Even though some people work as an employee on other jobs with taxes withheld, it is still important to make these estimated taxes if an individual has any self-employed income. An underpayment of taxes at the end of the year could result in a penalty. Therefore, making quarterly estimated tax payments will save the individual from being penalized for underpaying.
- If an individual had business expenses, these will be listed and deducted from the Schedule C earnings. The expenses must have concurred during the current tax year to claim as a deduction. A business expense is one that is common and necessary for the operation of that business.
- Many common deductions can be overlooked, such as printing business cards and postage. Forgetting about a deduction can cause an individual to pay more taxes.
An independent contractor or sole proprietor of a business will have different tax obligations than an employee. For instance, the self-employed individual will pay more Social Security and Medicare taxes than an individual who is not self-employed. An employer will pay part of these two taxes for their employees, but a self-employed individual will be responsible for all of the taxes.
How to Estimate Self-Employment Payments
- An individual can use the income tax return from the previous year to get an estimate for payments.
- Look at the income and the self-employment taxes to figure the payments.
- If this is the first year for self-employment, the taxes can be estimated based on the income that an individual plans to earn that year.
- Adjustments can be made to the estimated payments after the first quarter if the estimate appears to be too low or too high.
Self-employed individuals need to file accurate tax returns with the proper deductions. Keeping good records throughout the year will ensure that no deduction is overlooked. At the end of the year, the taxes will be easier to file when the information is accessible along with estimated payments.
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