As an independent contractor or self-employed individual, it is your responsibility to report your income and pay taxes accordingly. Self-employment income refers to the money you make through your business or self-employment activities such as freelancing, consulting, or running a home- based business. Taxpayers must accurately report their self-employment income when filing their taxes in order to avoid costly penalties, such as interest and underpayment fees. So, how should you go about filing your taxes when you are self-employed?
Understanding Self-Employment Income
Before you can accurately report your income and declare your self-employment income on your taxes, it is important to understand the two most common forms of income you will receive when you are self-employed.
Business Income: Business income is the income you make from customers who purchase goods or services you provide. This includes everything from selling products to providing contract labor or other services.
Passive Income: Passive income is income that you make from investments, such as rental income, interest from savings accounts, or capital gains from selling investments.
When declaring self-employment income, it is important to correctly report both types of income in order to get an accurate tax return.
Filing Requirements for Self-Employed Taxpayers
Self-employed taxpayers must comply with various tax filing requirements depending on their level of income. According to the Internal Revenue Service (IRS), self-employed individuals are required to file taxes if the income generated is greater than $400. If their self-employment income is lower than this amount, then they do not have to file taxes. Additionally, self-employed taxpayers must also file an annual return if they owe taxes, even if they did not make enough money to be required to file a return.
Additionally, self-employed taxpayers must also maintain and provide records of their income and expenses throughout the tax year in order to accurately report their financials at tax time.
Reporting Self-Employment Income on Taxes
There are two main forms self-employed taxpayers must complete in order to report their self-employment income on their taxes. The forms they must use will depend on the type of income they made throughout the year.
The first form is Schedule C, which is used to report profits or losses from a business. This form is also used to calculate the profit or loss from the business and any related deductions. The information from Schedule C is then reported on the taxpayer’s 1040 form.
The second form is Schedule E, which is used to report rental income and any losses from rentals. It is important to note that passive income is not subject to the self-employment tax, so losses from rental property cannot be used to offset the self-employment tax.
Additionally, self-employed taxpayers must also provide proof of all deductions taken for expenses related to their business or rental properties.
Calculating Self-Employment Tax
Self-employed taxpayers must pay the self-employment tax in addition to their income tax. The self-employment tax is calculated based on the self-employment income generated throughout the year. The taxpayer’s total self-employment income is multiplied by 92.35% and the resulting figure is their self-employment tax amount.
It is important to note that the self-employment tax is only paid on business income and not passive income, such as rental income or capital gains. Additionally, taxpayers can take deductions for certain business expenses and tax credits to offset their self-employment tax amount.
Paying Self-Employment Taxes
Self-employed taxpayers typically make estimated tax payments for their taxes throughout the year, which are then applied to their income tax and self-employment tax amounts when they file their return. It is important that self-employed taxpayers make estimated payments in a timely manner, as they can be subject to interest and underpayment fees if they do not pay enough taxes throughout the year.
At tax time, self-employed taxpayers can use the Schedule SE form to calculate their self-employment taxes. This form will also calculate any credits due and the amount due after applying credits to the self-employment tax. The form will also provide the self-employment tax due for the current year and the amount due for previous years.
Filing For Self-Employment Tax Deductions
Self-employed taxpayers can take a few deductions to reduce their self-employment tax locally. One of the most common deductions is the self-employment health insurance deduction. This deduction allows taxpayers to deduct premiums paid for health insurance coverage, as well as 50% of health insurance premiums paid for their spouse, children, and dependents. Additionally, taxpayers may also be able to deduct a portion of their home office space if certain criteria are met.
Taxpayers can also take deductions for certain expenses incurred in the course of their business, such as travel and entertainment expenses, office supplies, tools, advertising costs, and more. Additionally, taxpayers can deduct half of their self-employment tax amount as an “above-the-line” deduction on their tax returns.
Filing taxes as a self-employed individual can be a complicated process, so it is important to seek professional advice if you need help. That being said, by understanding the different types of self-employment income and necessary forms, as well as being aware of any deductions or credits you can take, you can accurately report your self-employment income and reduce your tax liabilities.