While there is a lot to be aware of when filing your taxes as a full-time employee, tax season can be especially difficult to navigate if you are self-employed. Defined by the Internal Revenue Service as anyone who carries on a trade or business as a sole proprietor or an independent contractor, part of a partnership, or is otherwise in business for his or herself; being self-employed requires a different filing method than other types of employment.
We’ve listed a few of the most common questions below, along with answers to help you this tax season:
What Are My Obligations?
As a self-employed individual, you likely haven’t been withholding a portion of your paycheck the same way you would have been as an employee of a company. Due to this, you’ll have to pay an additional amount on top of your current income tax. Also known as the self-employment tax, this value is used to compensate for not having a monthly withholding, and goes directly to Social security and Medicare. As a rule of thumb, it’s recommended you pay estimated taxes quarterly so that you’re not hit with a surprise bill at the end of the year. Depending on your net profit from being self-employed, you’ll fall into different income tax brackets, which you will also be responsible for.
How Do I Pay Quarterly Estimated Taxes?
The IRS has made it easy for self-employed individuals to pay their quarterly estimated taxes. Using their Estimated Tax for Individuals form 140-ES, they walk you through the process of determining how much you should contribute. From there, it’s all about making your payment. You can do this either via the blank vouchers located on the form or through their online payment portal, known as the Electronic Federal Tax Payment System.
How Do I File My Return?
Now for the most important part – filing your return. As we mentioned earlier, your net profit will have a lot to do with the amount that you owe in taxes each year. In order to begin filing your annual tax return, you’ll need to report income or loss related to your business using what’s called a Schedule C (instructions here). In addition to this document, you’ll also need to report your Social Security and Medicare by filing an adjoining Schedule SE (instructions here).
There you have it! Using the instructions outlined above, you’ll be well on your way to fulfilling your tax duties this year. With that said, the accounting world has many factors that can affect how much you need to pay the government. If you’re curious about exploring your options and potentially saving yourself a lot of time and money, hiring a professional to do your taxes is always a great choice.
If you would like to learn more about how we can help you and your business improve its accounting practices, reach out to our team. For more information on other accounting topics, check out our blog.