For people who work in conventional jobs, taxes are easy. The employer takes money out of every paycheck and withholds it for the government. At the end of the year, you get a statement of how much you’ve paid in income tax. You click a few buttons and receive an income tax return in most cases. It feels painless, and with the modern tools at your disposal, it’s one of the simplest things you can do. But what about the people who work for themselves? Self-employment makes tax time a headache for most small business owners. Here’s how to file taxes if you’re self-employed.
Figuring out your net profit or net loss
The first step when filing taxes as a self-employed professional is to figure out your net profit or net loss. This means adding up all of your expenses and all of your revenue. Just as a company would calculate profit as the difference between revenue and total costs, you have to do the same thing. There are many things you can calculate as business costs. Certain travel costs, your telephone, Internet service and even a part of your housing cost can be applied to the cost figure if you are working from home.
The profit number you come up with will be your starting point for taxable income. From there, you will have to deal with three different tax obligations. First, there is form 1040, which allows self-employed people to file in a manner similar to those employed in standard arrangements. On top of that, you will owe self-employment tax, which is essentially Social Security and Medicare taxation for people in your situation. You’ll also have to file state income taxes, assuming you work in a state that charges these taxes.
The quarterly payment requirement
The federal government understands that it’s risky to ask self-employed people to save a whole year’s worth of taxes to pay on tax day. This is why most self-employed people are required to pay an estimated amount of taxes once every quarter. To do this, one would go through a tax obligation estimate with form 1040-ES. This form and the worksheet that goes along with it indicate just how much a person can expect to owe. If you are self-employed, you would then either mail in a check to the IRS once every quarter or you can pay using the government’s online portal. As you pay every quarter, you are essentially doing what standard employees do at their jobs. At the end of the process, you may receive money back from the government if you have paid too much.
If you make over $400 from your self-employment activities in net profit, then you are required to file a tax return. If you earn under that amount, you are only required to file a tax return if you happen to fall under some other mandatory category. The most important step for self-employed individuals is to get a true accounting of net profit by accurately keeping records of all costs and self-employment revenue. This can help immensely with staying within the law and saving money.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!