I am so grateful to have had such a positive response from my blog entries with questions ranging from taxes to daily money management tools! Keep them coming!
Today, I’d like to focus on the first installment of tips regarding being self-employed and paying taxes.
There are a couple different ways to be classified as “self-employed”. You’re either:
A. You carry on a trade, or business, and operate as the sole-proprietor or independent contractor.
B. You are a member of a partnership that carries on a trade or business.
C. You’re in a business for yourself, like a part-time job.
For these types of occupations, it is important to stay current with your expenses and tax requirements as it is required to pay taxes 4 times, annually. You will not only pay an income tax, but are usually required to pay a SE tax as well. SE tax is similar to social security and medicare wages that are automatically deducted from paychecks when one is an employee.
Before you file these income and SE taxes, make certain you’re obligated. For instance, if your net profit is less than your net expenses, the difference is considered “net loss”, but you can usually deduct your loss from gross income on page 1 of Form 1040. If you make under than $400, then you don’t necessarily have to claim unless you meet qualifications for other filing requirements listed in the Form 1040 instructions.
Are you interested in how to file these payments quarterly? You will use a form called an “1040-ES” for estimated taxes for individuals. From the IRS website:
“Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.”
Scheduling your quarterly payments to keep ahead on anything you might owe the government at the end of the year. This will ensure that you do not fall behind, so the government won’t charge you interest!
See you next week for PART II on self-employed tips! Click here for the important forms from the IRS!