How to File Income Tax on Self Employment
Being self-employed is a wonderful experience--being able to set your own hours and having no one to answer to. However, one of the drawbacks is that you must be fully responsible for your own federal income tax. you have to be diligent with paperwork, withholding money and paying estimated taxes on time. The sum of the drawbacks does not outweigh the benefits of being self-employed and calculating and filing federal income tax is a simple and well-documented process.
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Instructions
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Withhold the self-employment tax of 15.3 percent, current as of 2009, monthly. The self-employment tax is used to pay for social services such as Medicare. In an employer-based job, the employer pays half of this tax, but being self-employed means that the responsible person must pay all of it.
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Pay estimated taxes on time. This is the sum of the withheld self-employment tax and taxes estimated based on the previous year's filing, which can be computed with Form 1040-ES (see Resources). Estimated taxes must be paid four times a year to avoid penalty fees, and the due dates are April 15, June 15, Sept. 15 and Jan. 15 (of the next year). Payments can be made on the Electronic Federal Tax Payment System website (see Resources).
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Apply any deductions to annual income by subtracting the claimed amount from annual income. The resulting amount is known as taxable income. One deduction that anyone can claim is "standard deduction" and the claimable amount is based on filing status (such as jointly or single). In 2009, a person filing single had a standard deduction of $5,700, and a married couple filing jointly had a standard deduction of $10,400.
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Calculate income tax based on taxable amount. The United States has a progressive income tax system in which the tax rate increases as taxable amount increases. The idea behind this is that money is worth more for people with lower income than it is for people with high disposable income. See Resources for an up-to-date income tax calculator.
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File federal income taxes with Form 1040. Form 1040 will ask for figures such as gross income, deductibles, filing status, and estimated taxes paid. If estimated taxes paid were completely accurate, then federal income taxes should not be owed. If you have paid more than you owe, the IRS will issue a refund or credit the amount to the next tax season. If you have not paid enough in estimated taxes, then payment must be sent along with Form 1040.
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Tips & Warnings
Consult with a qualified and experienced tax personnel to find other deductibles and exemptions to lower taxable income.
Be aware that each state has their own tax laws and residents might be required to file self-employment taxes with the state. See Resources for a link from the IRS website to all 50 official state websites to find out if your state has a self-employment tax.
References
Resources
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