Taxes are difficult, and unless you’re a certified accountant, there’s a good chance there are some gaps in your knowledge. Being self-employed means you’ll need to have an even more specified level of knowledge, too. While employees of a company generally have taxes automatically calculated and deducted from their pay, if you’re self-employed, you’ll have to do all this yourself. In addition to filing taxes annually, you will need to estimate what you owe and make payments every quarter. If this sounds daunting, rest assured many people have successfully done it, and the information here outlines some of the basics you might be wondering about.
Understanding What Self-Employment Tax Means
Employees who earn regular wages generally have federal income, Social Security, Medicare and state income taxes, if applicable, deducted from their wages. Since individuals who are self-employed don’t have regular deductions for these, the self-employment tax is typically imposed to cover Social Security and Medicare expenses. The tax rate is currently 15.3 percent, but it can be more depending on how much you earn and your filing status. Though this may seem steep, there are plenty of deductions and other breaks you can take advantage of to avoid paying an exorbitant bill come April 15.
Determining if You Must Pay the Self-Employment Tax
You might be wondering whether or not the self-employment tax applies to you. It’s not as difficult to determine as you’d think. There are a few criteria you can examine to determine whether or not you will have to file for the tax. Consider the following most common criteria:
- Are you a sole proprietor?
- Do you own and operate your own business?
- Did you answer yes to either of the above and make $400 or more in a year?
If these statements apply to you, you will need to file for and pay the self-employment tax.
The self-employment tax might seem like it places a harsher burden on non-wage-earning workers, and this can be true if you don’t do your research and ensure you pay the correct amount of taxes. How do you minimize the impact and ensure you maintain profitability? Making the most of potential deductions is your best bet. Here are a few of the most common ones:
- Costs associated with maintaining your home. If you work where you live, you can likely deduct a chunk of your living expenses from your taxable income.
- Car and driving expenses. Your income may rely on your ability to drive, and if so, it’s quite possible you may be able to write off expenses such as auto insurance and gas.
- Internet access. Practically every self-employed person relies on the Internet in some capacity, so if you use it to make money on a regular basis, you can list it as a deduction when you file.
- Other supplies and equipment. Paper clips, ink for a printer, computers and home office necessities are all common write-offs that, if invested in, you may be able to claim.
Deductibles depend on the nature of your business, so you should examine yours closely to see what other opportunities exist.
How and When to Make Your Payments
Business owners may use a taxpayer identification number, and individuals will need to use their social security number in order to make payments for taxes. Unlike people who work for a company, self-employed individuals must make quarterly payments. The 1040-ES worksheet is designed to help determine estimated taxes due. Once you have calculated that amount, you can make the payment either by mail or online through the Electronic Federal Tax Payment System.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.