How To File Taxes Being Self Employed – Sarah is an enrolled agent with the IRS and a former staff writer at The Keeper. In 2022, he was named among the 20 most influential CPA practice advisors in accounting under 40. His work has been featured in Business Insider, Money Under 30, Best Life, GOBankingRates, and Shopify. Sarah has spent nearly a decade in the public accounting field and has extensive experience in strategic tax planning at the state and federal level. His clients come from a variety of industries, including oil and gas, manufacturing, real estate, wholesale and retail, finance, and e-commerce, and he has served C-corps, S-corps, partnerships, nonprofits, and sole proprietorships. taxes have been arranged. ownership In her free time, she is a devoted cat mom and enjoys hiking, painting and watering her house plants.
First, determine whether you need to pay self-employment tax, which applies to all earned income. Then, calculate your net income by subtracting business expenses from your gross income, and use that to estimate your self-employment tax at a rate of 15.3%. Finally, be sure to estimate your quarterly tax payments if you estimate you owe more than $1,000 and file the necessary forms such as Form 1040, Schedule C and Schedule SE.
How To File Taxes Being Self Employed
Don’t buy? Let’s put the theory to the test: For the next 10 minutes, smile as hard as I can while I show you how to give your hard-earned money to the IRS in seven easy steps.
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Right! Today we’ll smile through the pain while learning how freelancers, gig workers and independent contractors should calculate, pay and file their self-employment taxes. ready? let’s go!
Bottom line: Self-employment tax applies to all “earned income” received in exchange for money or products or services. Right or wrong, this is your main source of income.
For example, you work a standard 9 to 5 job, but sell your handmade jewelry on Etsy to make a little extra money. Your sales are subject to self-employment tax!
Let’s take a moment to make sure we understand self-employment taxes. If you are self-employed, you pay FICA taxes, which include Social Security and Medicare taxes. It is automatically deducted from the employee’s W-2 wages.
How To File Self-employment Taxes, Step By Step: Your Guide
For employees, they have the privilege of paying it themselves, with a tax rate of 15.3%. Unfortunately, this has been added
To find out more – including why these rates are so high – see our guide to self-employment tax. Meanwhile, how is the smile holding up?
This is the starting point for all taxes: you need to know how much income you earn before anything else becomes relevant. If you don’t have good records to rely on, the year-end tax form you receive is important.
If you earned more than $600 from a client or work platform, they will likely send you a 1099-NEC by January 31st. You may also receive a 1099-K, which reflects payments you received through a third-party payment processor such as PayPal or Stripe.
Pain Free Tax Filing [infographic]
You can use this report to reconstruct your income for the year. I also recommend that you check your bank statement for any income that you may have missed, or that is below the $600 reporting threshold. (Just because it’s not reported by the client doesn’t mean it’s not taxable!)
Ideally, you already use the Keeper app to track your business expenses throughout the year. If not, then shame on you.
Fun! We’re not judging here (unless you’re one of those people who puts ranch dressing on watermelon).
Now that your bank statement is open, go ahead and scan business-related expenses as you go. And don’t forget to check your credit card purchases too!
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If you’re not sure if something counts as a deletion, check out Keeper’s Free Resources page! Or to make it even easier, download the app and link your account so we can do the checking (and tax filing!) for you. Some common business expenses include:
Once you know your annual business expenses, you can subtract them from your gross income to determine how much you will actually be taxed.
Doing it at the last minute? Don’t feel bad: It’s not unusual for freelancers to keep records until the end of the year and stop thinking about taxes, so you’re in good company.
Now you need to figure out how much to pay. If it’s your first year going solo, be prepared for a higher tax bill than usual, thanks to the 15.3% self-employment tax.
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Unfortunately, paying self-employment taxes isn’t the only thing that makes tax season more difficult for freelancers. One of the benefits of W-2 employment is that there are fewer surprises when it comes time to pay.
Income taxes and FICA are automatically withheld by the employer and remitted to the IRS when they are earned. Self-employed people, on the other hand, find it difficult to automate their tax bills.
Remember what I told you to do in steps 2 and 3? Now you can use it! To estimate your SE tax, you need to know it
For example, say you earn $10,000 in gross revenue and have business expenses of $5,000. Your net income is $5,000. You will owe SE tax on this $5,000, not the full $10,000. So your SE tax is $765 ($5,000 x 15.3%).
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If you want to take a shortcut here, Keeper offers a free 1099 tax calculator that can do this calculation for you.
By April 15th. They become adults when income is earned. This is why employers remit payroll taxes throughout the year.
Of course, freelancers and independent contractors don’t have a company that can do it for them. As a result, most of them are required to pay taxes every quarter, in the form of “estimated tax payments”. This payment must be made on the 15th working day of each month
Anyone estimated to owe more than $1,000 to the IRS is required to make quarterly payments or face an underpayment penalty.
What Documents Do I Need To File Taxes?
Do you think it might be you? Use our quarterly tax calculator to find out how much you should pay before your next estimated date (and whether you should pay early).
For taxpayers with W-2 income only, if their income for the year is less than the standard deduction ($12,400 for 2021), they do not need to file a tax return at all.
If you do your own taxes, here are the forms you need to fill out on your annual return:
This will be familiar to most of you. The 1040 is the form that individual taxpayers use to report all taxable income and calculate taxes.
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This form is for sole proprietors or anyone with self-employment income. You will use this to report your total business income and expenses.
The net income on line 31 of Schedule C is carried over to Schedule 1 and Schedule SE 1040 to calculate the tax you owe.
When you fill out Schedule C, you’ll notice that it lists several types of business expenses. Most are easy to understand, but some are confusing.
Let’s look at some of the more challenging types. And if you want a detailed step-by-step guide, check out our comprehensive guide to filling out your Schedule C.
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This category is used to report inventory costs. This includes physical and virtual products. For example, if you sell online advertising, the cost of acquiring digital advertising space can be listed here.
Be sure to fill in the Cost of Goods Sold section on page 2 of Schedule C if you plan to use this line.
If you are claiming car expenses, you must complete Part IV on page 2 of Schedule C
Pro Tip: You’ll also be asked to fill out Form 4562 if you intend to value your vehicle – more on that below! If you fail to answer the questions on page 2, your vehicle will be rejected.
How To File Self-employment Taxes
To use this category, you must fill out Form 4562 which lists all your fixed assets (such as machinery, equipment and vehicles) and their basis and method of appreciation.
If you plan to itemize your home office deduction instead of claiming the simple amount, you must complete Form 8829 and attach it to your return.
If that all feels like too much to keep track of, the Keeper app can fill out these forms and categorize your expenses. Why add the headache of filing a tax return to the hassle of paying self-employment taxes?
Schedule SE is used to calculate your self-employment tax. You’ll fill it out next to Schedule C and attach it to the 1040 when you file.
How Self-employment Taxes Work
Alternatively, you can upload your data to the Keeper app, and we can archive it for you.
At Kiper, we’re on a mission to help people navigate the complexities of tax. We provide this information for educational purposes, and do not constitute tax, legal or accounting advice. If you want a tax expert