Self Employed Taxes
Self employed people form a huge percentage of the economy in the United States. Unfortunately, this means self employed taxes are a popular subject with the IRS and state tax agencies.
Self Employed Taxes
As a self employed person, the IRS views your business as a pass through entity. A pass through entity is simply one in which all business finances are recorded on your personal tax return. In essence, the taxes related to the business pass through to your personal runs, hence the name.
Typically, you are going to report all business income, deductions, credits and so forth on Schedule C of form 1040. “Profits or Losses from Business” is the title of the Schedule and you will fill it out and file it in congruence with your person taxes on the 1040 tax form.
With your self employed taxes, the profit of your business activities is the magic number from which taxes are determined. Typically, the profit for the business activities will be gross revenues minus tax deductions and credits. Allowable deductions vary from business to business, but generally are those incurred in the pursuit of a profit. Such deductions can include marketing costs, business auto expenses, banking fees, business credit card interest, business cell phone usage and so on.
Estimated taxes are a particular downside to being a self employed business person. The IRS isn’t willing to wait to the end of the year to collect your business taxes. Instead, the agency wants to money as soon as it can get it, a process better known as paying estimated taxes. To pay estimated taxes, you need to guesstimate your yearly profit and send in one quarter of the taxes due on that amount each quarter of the year. Don’t worry about forgetting to do it. The IRS will send you coupons and forms to make sure the money comes in!
Perhaps the worst tax issue with being self employed is the much hated self-employment tax. A person receiving a salary from a company is use to seeing money deducted for FICA, Medicare and so on from their check. The federal government has never figured out a good way to get this out of self-employed individuals since they don’t typically use payroll services. The result of this quandary is the self-employment tax, a tax of 15.3 percent of the first $90,000 of income you make. Many self-employed people are put into serious financial hardship the first time they file because they are unprepared for this additional tax. Make sure you plan for it to avoid such a situation.
Self employed taxes are not particularly complex, but many get blind sided the first time they file. Prepare for yours and you should be fine when tax day comes.