Self-employed individuals are those who carry out a trade or business as an individual contractor or a sole-proprietor. Similarly, those who have a part-time business, or are a partner in a business, are also considered self-employed. Being their own bosses, a lot of self-employed people are unsure about their tax obligations, which is the reason we have put together this post, answering six most frequently asked questions we receive from self-employed taxpayers.
1. What are my tax obligations?
Self-employed individuals are required to pay both income tax and the self-employment tax (SE Tax). The SE tax refers to the Social Security and Medicare taxes and not the income tax.
2. How to determine if I am subject to any taxes?
To find out if you are subject to income tax and self-employment tax , subtract your business’ monthly expenses from profits. If the profit is $400 or more, you are required to file your income tax return. If it’s less, you don’t have to file your income tax return, unless you meet any of the filing requirements listed in Form 1040 instructions.
3. Are self-employment tax Tax and Income Tax the same?
No. self-employment tax tax refers to the Medicare and Social Security taxes that all self-employed individuals are expected to pay to the Social Security Administration. In addition to the self-employment tax , self-employed individuals are also required to pay an income tax, depending on their overall earnings.
4. What if I incurred losses?
If your expenses are more than your what you earned, you can deduct the losses from your annual gross income on Page 1 of Form 1040. The losses, however, are limited in certain cases, and you cannot deduct the entire losses incurred from the gross income. To learn more about the limitations, you may visit the official website of IRS and see Pub 334 Tax Guide for Small Businesses or speak with one of our tax consultants.
5. Do I need to make quarterly estimated tax payments?
Self-employed individuals are required to make these payments as they do not have any employer to withhold their taxes. To find out whether you are supposed to make a quarterly estimated tax payment, use the worksheet in Form 1040-ES (Estimated Tax for Individuals). You would also require previous year’s annual tax return for filling out the form. If this is your first year as a self-employed individual, and your wrongly estimated your earnings, you must complete another Form 1040-ES to recalculate the taxes for the next quarter.
6. What forms should I use for filing my returns?
Self-employed individuals must use Schedule C or Schedule C-EZ to file their annual tax return. Both Schedule C and C-EZ will help you report income or loss that you made from your business or profession. The Form C-EZ is specifically used by small businesses and statutory employees with expenses equal to or less than $5000.
Must Read: A Brief Guide to Choosing the Right Tax Form
Need Expert Help in Filing Your Taxes?
Whether it is your first year being self-employed or you have been your boss for years, if you are facing any issue in filing your taxes, feel free to get in touch with one of the tax experts at the Law Offices of Nick Nemeth for a free no-obligation consultation. To reach us, simply call (972) 627 4784 or write to us at info@myIRSteam.com. You may also fill out our contact form and we’ll take it from there.