Time to get down to business: it's self-employed taxes for dummies season! You need to learn more about self-employment income taxes, from what does self-employment tax cover to what income is subject to self-employment tax. Take your self-employment tax season to the next level by finally learning what your taxes on self-employment income means.
If this is your first time working on self-employment income taxes, don't worry. This guide to self-employed taxes for dummies will help answer your questions and put you at ease about following federal law. Keep reading for your ultimate self-employed taxes for dummies guide! Learn how to do your self-employment taxes right.
What Does "Self-Employed" Mean?
Someone self-employed can mean many things. As of 2019, 16 million Americans were self-employed, so they had taxes on self-employment income to pay. First, your business is for yourself, or you are in it for yourself, even if that is part-time work. You could also be in a partnership, where you both mutually do business or work in a trade.
As a sole proprietor in self-employment, you own an unincorporated business. If you operate your business or LLC as a corporation, then you are not a sole proprietor. One common form of self-employment is working as an independent contractor. This means you contract your services and skills out to entities or via freelance. Is your self-employment your hobby or your business?
Filing taxes as a freelancer is not as difficult as it seems, once you learn what self-employment income taxes cover.
What Does Self-Employment Tax Cover?
So, what does self-employment tax cover? Self-employment income taxes are there as a Social Security and Medicare benefit for self-employed people. Since you work by yourself, the self-employment tax acts like Social Security and Medicare taxes do to workers who earn wages. Income tax is separate from self-employment tax.
Income tax can include passive income because passive income does not count toward your self-employment taxes. You also need to make sure to pay quarterly payments for your taxes if you know you will make $1000 or more that year from self-employment. Knowing when taxes on self-employment income are due is important.
When Are Quarterly Payments Due?
You can pay your taxes on self-employment income in quarterly installments. For the three months before the quarter deadline date, you will need to calculate and then pay the correct amount in taxes. Quarterly payment deadlines for your taxes are April 15, June 15, September 15, and January 15 of the next year. You will need to pay 15.3% of your earnings in taxes during each quarterly period.
If you don't want a nasty surprise, the surprise being a giant tax bill once a year for your unpaid taxes, following the quarterly payment plan will help you keep better track of your self-employment taxes.
Do All Payments Need to Be On Time?
Yes, all payments need to be on time. The IRS wants your money to make sure you are paying your fair share. If you do not pay on time, you may be liable for certain fines or other penalties. Do yourself a favor and stay organized about when your payments are due. Save yourself the trouble!
What Income Is Subject To Self-Employment Tax?
You might be wondering what income is subject to self-employment tax. As someone self-employed, all of your income is subject to a self-employment tax. This is because you do not have an employer that withholds taxes for you, so you and an employer are also not splitting taxes for Social Security and Medicare. Therefore, you are responsible for the bulk of it.
If any work has resulted in $400 or less in income, then that income is exempt. You do not need to file if you made less than that. Don't panic if you think you will pay a lot in self-employment taxes! Your taxes are not as much as you may think they are. Running businesses is costly and does not come without expenses. Because of this, you can file for deductions.
What Deductions Are There for Self-Employed Individuals?
Deductions are your personal business costs. They will help you pay less in self-employment tax, as you bore those costs on your own to start and continue your self-employment. You can deduct for things like health insurance and education expenses, as well as phone/internet expenses, office purchases, and travel mileage. Doublecheck what you are allowed to deduct to make sure not to make a mistake on your self-employment taxes.
How Is Self Employment Tax Calculated?
First, think about your net earnings in self-employment. That number is comprised of your gross income as well as any business expenses you had to endure (those are your deductions). After that, apply the 15.3% for taxes to your net earnings to figure out how much you owe in self-employment taxes.
How Does a Person File for Self Employment Taxes?
First, you need Form 1040. This is the way you can file all of your earnings for your self-employment. There are also other forms you may need to fill out, such as:
- Schedule SE form if for self-employed individuals
- Schedule K-1 for multi-member LLCs or partnerships
- Schedule C for sole proprietors or owners of an LLC
The IRS has copies of these forms on their website for you as well. Fill these out for your records, as well as for the IRS. You may need to create a W-2 form if you have any employees or contractors working for you.
There You Have It: Self-Employed Taxes for Dummies
This guide to self-employed taxes for dummies gives you the knowledge to file your self-employed taxes properly. You learned many things, from what does self-employment tax cover to what income is subject to self-employment tax. Make sure you understand what sort of self-employment you do and then what deductions you can claim.
After that, file your self-employment taxes like the rest of the self-employment workforce! Self-employed individuals are a staple of the work world. Knowing how to fill out and file your self-employment taxes correctly will save you a lot of hassle later. Are you looking for paystubs or have another question for us? Contact us today so we can get started on helping you fill out your tax document.
In the case of disaster situations, you get to have a tax relief as well. You might want to find out more about this tax relief in order to save some money.