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Sep 24

7 Important Things to Know About Self Employment Taxes

Reading Time: 4 mins

The self-employment tax does not have to be intimidating. Filling out the tax forms can be done in a quick and easy manner as long as you are well informed. By being familiar with all the facts that are important you can quickly resume managing your small business. These seven tips can help when it comes to situations regarding your finances.

 

1. Inform Yourself

What one needs to know before they dug deep into a world of taxes, is some basic information. A self-employed person needs to be aware of their total income and needs to make a list of expenses. That way you will know how much you are allowed to take from your budget. Customers that owe you for your services is also an important thing to pay attention to.

As someone who is managing their own company, you need to know the deadline for your tax filings and instructions that come with any specific paperwork. In case you have made 400 dollars or more, and in some cases even less as self-employed, you need to file your taxes.

 

2. I Am Not Self-Employed. Or Am I?

Just because you do not own a company or a small business, does not mean that you are not considered “self-employed”. That means when it comes to taxes, any additional income that you may receive, even if you have a primary job, can be taken into account. If you make handmade jewelry, for example, and sell it online on some platform, even though you regularly work at the office, it will be considered as self-employment, and independent contractor taxes will appear. Have in mind that it would not be smart to avoid it. You have to report any kind of additional income that you receive whether it is from a hobby or any side job. By doing so, you can prevent potential negative consequences. 

 

3. Cut Expenses Down

In case you were wondering, there are some ways to reduce the amount of taxable income. That goal can be achieved by deducting business expenses that you may additionally make. This may include travel costs, payments regarding vehicles, entertainment, food, and utility bills.

 

4. Filling Out the Forms

In case you need to declare any income, there are certain forms that can be filled. Depending on what kind of income it is, the forms differ. For example, if your earnings are very simple, Schedule C-EZ should be the one where the earnings should be reported.  It relates to profit or loss that may occur in the service you provide or business you have. 

Schedule C includes everything from working full time as a marketing consultant, to working as a babysitter in the neighborhood. The point is, even if you have a simple job, you have the right to make a deduction against that income by using Schedule C declaration. 

7 Important Things to Know About Self Employment Taxes

 

5. Every “Step” Counts

Is there a possibility that you have bought some sort of gear that is required for your company? Well, the great number of expenses that may show up from owning a private business, like in this case, is allowed to be subtracted by the IRS. It is even allowed to deduct a standard mileage for every step you have that is related to the activities you need to have because of your job. For example, in 2016, the mileage rate was 54 cents a mile.  So, one should always track these expenses during the year. By counting them in time, the tax bill can be dramatically lower in the end. 

 

6. How Much Should I Pay?

Unlike regular employees that have to file a tax return once a year, those that have their own business have to do some extra work when it comes to paying taxes. It is usually estimated and comes generally one each quarter. 

The reason would be that those that have traditional jobs have a certain amount of their paychecks withheld for tax purposes while those that are self-employed, can not that easily provide that money to the IRS. In order to evaluate what that amount is, one would have to make an assessment of earnings through the year and pay the sum of a quarter of that total as a tax. That particular tax applies only if that estimate exceeds 1000 dollars or more during the year. 

 

7. Having a Partner

In case you decide to have a partner in your business, you will most likely have to file it as a corporation or a partnership. The partnership must be categorized as an information return and it usually does not pay federal income tax. Information returns are tax documents. 

People who have their own businesses have to report the transactions for that commerce to the Internal Revenue Service and that is what those forms are for. The most common one to use is Form K-1 and it is used to report an individual’s share of the partnership and their business income to the federal government. 

Regardless if you are self-employed full time or you just have some side jobs that make you some extra income, there for sure is a lot to manage when it comes to taxes. By being informed and aware of all steps you need to take, you will be well prepared and on the way realize that the tax filing process is not as hard as it may look.

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