Taxes & Self Employment

Save
Being self-employed brings with it extra tax requirements.
Being self-employed brings with it extra tax requirements. (Image: Noel Hendrickson/Photodisc/Getty Images)

When you work as an employee, you usually only think about taxes when you're filing your income tax return. When you're self-employed, taxes are more complicated. You make quarterly payments, calculate self-employment taxes, and figure your net business income when you file your income tax return. Know what the IRS expects from you to avoid interest and penalties.

Estimated Tax Payments

When you're self-employed, you make payments to the IRS throughout the year based on how much you estimate you will owe at tax time. You don't have an employer to withhold money for taxes from your paychecks. The IRS requires you to make equal payments at least four times per year. To avoid penalties, your total payments must be at least 90 percent of what you end up owing for the year or 100 percent of what you owed for the previous year. For example, if the previous year you owed $5,000 in federal taxes, you make four quarterly payments of $1,250 each.

Self-Employment Tax

Self-employed individuals pay a self-employment tax instead of FICA taxes. The self-employment tax consists of a 12.4 percent Social Security tax and a 2.9 percent Medicare tax. The Medicare tax applies to your entire net self-employment income, regardless of how much you make. The Social Security tax applies only to a certain amount of income each year, which is adjusted annually for inflation. As of 2015, the Social Security tax applies to the first $118,500 of income.

Filing Income Taxes

When you file your income taxes, you use Schedule C to figure your net self-employment income by reporting your income and expenses. However, if you have less than $5,000 of expenses, use the cash method for tracking your income and expenses, don't have inventory, employees or a net loss and aren't taking a deduction for the business use of your home, you can use the shorter Schedule C-EZ. You use your net self-employment income to figure your self-employment taxes due with Schedule SE and to know how much income to report on your Form 1040 tax return.

Extra Deductions

Being self-employed offers a few tax benefits. You can deduct one-half of your self-employment taxes, and you may qualify to deduct the cost of your health insurance premiums as an adjustment to income -- meaning you can claim them without itemizing or having to have expenses that exceed 10 percent of your adjusted gross income. To qualify, the insurance plan must be established under your business name, and you can't count the premiums for any month that you were eligible to participate in a plan sponsored by your employer, your spouse's employer or the employer of your under 27-year-old child, according to IRS Publication 502. In addition, the deduction can't exceed the profits from your self-employment.

Related Searches

References

Promoted By Zergnet

Comments

You May Also Like

Related Searches

Check It Out

4 Credit Myths That Are Absolutely False

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!