Filing taxes can be tricky, especially when you’re not working in a traditional employment situation. Whether you’re an independent freelancer, engaged in a start-up partnership or the sole proprietor of your own business, here’s a quick guide to everything you need to know about paying taxes when you’re self-employed.
Self-Employment Tax
Along with paying income tax, people who are self-employed need to pay a separate self-employment tax. The self-employment tax covers Medicare and Social Security taxes, which would normally be split between employee and employer. As a self-employed person, you’re responsible for this entire sum, which is currently taxed at a rate of 15.3%. The good news is that there’s a ceiling to how much self-employment tax you can pay, with various adjustments depending on your total net earnings.
Income Tax
People who are self-employed also pay income taxes, just like anyone holding down a traditional job. You should report your business income on your annual tax return, as well as any business losses if applicable. To reduce a sudden and overwhelming tax burden, aim to set aside some of your earnings throughout the year in preparation for tax payments.
Quarterly Payments
Self-employed individuals are often required to make quarterly payments on their estimated taxes. The IRS offers more information about estimated taxes, withholdings and how to pay, at irs.gov. Remember that even if you are making quarterly payments, you still need to file a tax return every year. This will help to determine how much you need to pay in Social Security and Medicare taxes.
Tax Deductions
While the tax burden on self-employed individuals can seem strenuous, there are also many opportunities to take advantage of tax deductions and write-offs. If you’re self-employed, you can deduct start-up costs of a new business including legal expenses and property purchases; a home office setup, plus all supplies and equipment primarily used for your job; healthcare costs for yourself and family members; and lots more. When you file your annual tax return, you’ll have the opportunity to choose the standard deduction or an itemized deduction: so keep track of your business costs and crunch the numbers to see which option will save you the most money.
Other Tax Credits
Despite not working for an employer, you’re still eligible for a number of tax deductions and tax credits, just like any other salaried employee. Low- to moderate-income workers may qualify for an Earned Income Tax Credit, especially if looking after dependents. Special benefits and tax credits are also set aside for military veterans, some homeowners, parents and people looking after a dependent relative, students at qualifying institutions for higher education, and more. Tax credits also change with every tax cycle, and can offer both federal and state benefits, so be sure to stay up-to-date and fill in your tax return carefully.
Filing Your Taxes
Tax filing can be tricky, whether you’re self-employed or not. FreeTaxUSA is a good online resource offering completely free tax filing software to assist people in filing their annual return for federal taxes. The software will help you answer a set of questions to fill out the necessary tax forms. Speaking with a financial advisor or professional accountant can also be a good idea, to ensure you’re meeting your tax obligations while also taking advantage of all applicable deductions.
