With tax season rolling around, I have pulled together this handy guide to help self-employed workers navigate their filings. Resources and support such as this is why more people are choosing to join my Norwex Go Green Team.
Head to irs.gov for even more information. As the site notes:
- Self-employment can include work in addition to your regular, full-time business activities, such as part-time work you do at home or in addition to your regular job.
- If you are self-employed, you generally have to pay self-employment tax and income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct an employer’s equivalent portion of your self-employment tax in figuring your adjusted gross income. In previous years, the deduction was equal to one-half of self-employment tax.
- You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.
- If you are self-employed, you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments, you may be penalized for underpayment at the end of the tax year.
- You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.”
And what should consultants do about actually filing taxes? Check out these tips from The Street:
Look for Help
If this is your first time filing as a self-employed taxpayer, you might not want to tackle it alone. “If you have a significant change in your tax situation, it might be a good idea to hire a professional,” says Keith Hall, a CPA and tax expert with the National Association of the Self Employed. “You can then use (a previous) return as a template for what forms to fill out and what deductions to look for on future returns.”
At the very least, use online tax software such as TurboTax or TaxACT. “Math errors are the number one reason that people get a reply from the IRS,” says Hall. “Transposing numbers in a Social Security number or making a mistake when transferring totals from one form to another is easy to do. The software is designed to take care of that, and to check the math.”
What You Need
Whether you hire a professional or do it yourself, you’ll need to gather the following information:
- All of the paperwork documenting your business income: typically sales receipts or, in the case of contract work, 1099-MISCs. (The moment you fill out a Schedule C, for business profit or loss, you increase your likelihood of getting audited. So make sure you have the backup documents.)
- Any income you received as an employee, documented on W2s.
- Documentation of any other income, such as dividends or interest from investments.
- A list of business expenses including travel, equipment purchases, contract expenses and association fees, along with receipts and other documentation needed to support each claim.
- Documentation of personal deductions such as mortgage interest payments, health insurance premiums, student loan interest payments and so on.
If you have trouble finding the necessary paperwork, take it as a sign that you need to develop better systems for organizing your tax records.
Consider an Extension
If April 15 looms, and you’re not ready, you can e-file for an automatic six-month extension using Form 4868. While the extension gives you time to do your paperwork correctly, it doesn’t let you postpone your payment — you still have to pay the IRS by April 15 or pay penalties and interest.
You should have at least a rough idea of your revenues and major expenses, so you can base your April 15 payment on those numbers. You can then use the extra six months to gather the necessary information and fine-tune the numbers on your return. If you overpay in April, you can get a refund when you file in October. But if you underpay in April, you may owe interest on the difference.
Use all business deductions
One of the biggest differences between filing as a self-employed person and filing as a regular employee is your overall tax liability: You’re likely to owe more when you’re self-employed than you would as an employee, because you must pay FICA (Social Security and Medicare) taxes as both employer and employee.
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