It is important to know early on what your status is as an employee and how you qualify when it comes time to file taxes. Many people work on a contract basis or work for themselves as the sole proprietor. Here are some guidelines and tips to follow on tax obligation if you are determined to be self-employed.
Consider Yourself Self-Employed if Any of the Following Apply to You:
- You carry on a trade or business as a sole proprietor or an independent contractor
- You are a member of a partnership that carries on a trade or business
- You are otherwise in business for yourself (including a part-time business)
What Are My Self-Employed Tax Obligations?
- As an individual generally you are required to file an annual return and pay estimated tax quarterly.
- Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for people who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general any time the wording “self-employment tax” is used it only refers to Social Security and Medicare taxes and not any other tax (like income tax).
- Before you can determine if you are subject to self-employment tax and income tax you must figure your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040. But in some situations your loss is limited.
- You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400 you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions.
How Do I Make My Quarterly Self-Employment Tax Payments?
Because you do not have an employer withholding your Social Security and Medicare taxes and income tax you must use the estimated tax method to pay. Form 1040-ES is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.
This form also contains blank vouchers that you can use when your mail your estimated tax payments. You may also make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed you will need to estimate the amount of income you can expect to earn for the year. If you estimated your earnings too high simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.
How Do I File My Annual Self-Employed Tax Return?
To file an annual return as a self-employed worker you will need to use Schedule C to report your income or loss from a business you operated or a profession you practiced as a sole proprietor. Small businesses and statutory employees with expenses of $5000 or less may be able to file Schedule C-EZ instead of Schedule C.
In order to report your Social Security and Medicare taxes you must file Schedule SE. Use the income or loss calendar on Schedule C or Schedule C-EZ to calculate the amount of Social Security and Medicare taxes you should have paid during the year.
For more information or if you would like to schedule a first consultation with Lindemeyer contact us online today.