Self employed taxes can be a hassle. However, you need to understand them if you want to run a successful business. Each tax situation is unique, so you should at least understand what you’re up against. If taxes drive you crazy, you’re not alone. However, every business owner should be aware of their potential tax liabilities. We know taxes can be complicated, so we put together this easy-to-read guide to explain self-employed taxes in simple terms. Our ‘Self-Employed Taxes for Dummies’ guide will teach you the important parts without making your head spin.
1099 Independent Contractor
The IRS classifies many self employed workers as independent contractors. These are individuals who don’t necessarily have a full operation going, but more so a one man show, like a freelance graphic designer or writer. This also applies to many people who work in the Sharing Economy. If you list your vehicle on Turo, host on Airbnb, drive for Uber, use Upwork to find freelance work you are considered an independent contractor. As an independent contractor you are able to set your own fees and work on your own time. You are also responsible for calculating and remitting your taxes, since an employer isn’t withholding and remitting taxes on your behalf. Many self-employed contractors receive 1099s.
What Is a 1099 Form?
Businesses use form 1099 to report income. There are several different forms of 1099’s. 1099 K and 1099 MISC are the most common. Businesses issue these forms to report income for independent contractors.
1099K
A 1099 K is the type of 1099 you will receive from a 3rd party site like Turo, Airbnb, Uber, and Upwork. These companies facilitate payment for your services. It is important to note that a 1099 K will only be issued if you reach 200 transactions and have over 20 K in revenue. In addition, any fees charged by the 3rd party may be subtracted from your total earnings.
1099 MISC
Individuals and businesses issue form 1099 MISC. Businesses must issue this form to contractors when they pay them more than $600 over the course of a year.
For example: if you work as a freelance graphic designer and your total revenue from a particular client is $1,200 for the year, you should receive a 1099 MISC. This goes for your business too. If you pay a contractor more than $600 in a year, you must issue form 1099 MISC.
When it comes to 1099s it is important to make sure you are accurately reporting the income. The IRS also receives a copy of Form 1099, and they will cross-reference the income you report. As always, honesty is the best policy.
Self-Employed Taxes for 1099 Contractors
As we mentioned above, being self employed or working as an independent contractor comes with certain self employed tax responsibilities you need to be aware of. Failure to remit the right taxes on time can result in costly penalties and interest payments to the IRS.
Estimated Taxes
Self-employed earners must pay estimated taxes. You don’t have an employer, so no one is withholding taxes from your income throughout the year. The IRS doesn’t want to wait to collect, so estimated tax payments are required.
How do you know if you owe estimated taxes? Well, do you expect to owe more than $1,000 in taxes? If so, you need to make estimated tax payments. The IRS expects you to pay estimated taxes every quarter.
When Are Quarterly Taxes Due?
Estimated tax payments also known as quarterly taxes are due each quarter. Payments are due: April 15, June 15, Sept. 15, and Jan. 15. If the 15th falls on a holiday or weekend, the due date falls on the next business day.
How To Pay Quarterly Taxes
You may be wondering how you are supposed to pay taxes on income you haven’t earned yet. You are not alone, calculating the right amount to pay for your estimated taxes can be tricky. The easiest way to calculate your estimated taxes is to pay the total amount you paid in taxes the previous year. Simply divide the total by 4. For example: if you paid a total of $1,200 in taxes the previous year, divide 1,200 by 4 and you get 4 payments of $300.
The easiest way to pay your quarterly taxes is online.You can create an account on the IRS website and make all of your tax payments conveniently online.
Filing Taxes As Self Employed
Filing self employed taxes isn’t as straightforward as it is for W2 employees. You need to pay close attention to tax deductions and all sources of income. When preparing self employed taxes you will be required to fill out a Schedule C.
IRS Schedule C
An IRS Schedule C is used to report income or loss from a business you operated. It is where you will fill out the income you earned from your business, as well as your deductible expenses. To fill out a Schedule C you will need to gather important information regarding your business. The IRS needs the name of your business as well as the nature of your business.
You will need to provide your tax ID number or social security if you don’t have a tax ID number. To complete a Schedule C you will need to calculate your business income. This includes income from receipts or services, returns or allowances, and tax credits and refunds. You will next need to list your business expenses. These are deductible expenses that will be leveraged against your taxable income to lower your tax bill. Your net income is what you are left with, and what you will report on your 1040.
Self Employed Tax Deductions
Tax deductions are really important for your self employed taxes, as they have the ability to significantly lower your tax liability. The key is to know which tax deductions apply to your business. Some general tax deductions for self-employed include:
Business Insurance
Business-related insurance premiums, like business liability insurance or commercial vehicle insurance, are considered deductible expenses. Only necessary insurance policies qualify, so only policies that you need to protect your business qualify.
Cell Phone and Internet
Having cell service and internet are crucial for running your business these days. The IRS allows you to deduct the business portion of your cell phone and internet
Continued Education
Spending money to further your career by continuing education in your field is not only good for your business but also for your tax situation. You are allowed to deduct the cost of continued education so long as it is a business-related expense. This includes the cost to attend a course, seminar, traveling to and from classes, and class supplies.
Health Insurance Premiums
Self-employed earners can deduct the cost of their health insurance, including dental and qualified long-term care premiums. You can also write off premiums for your spouse and qualified dependents.
Home Office Tax Deduction
The home office deduction allows you to deduct $5 per square foot, up to 300 square feet for exclusive home office space. Exclusive being the operative word. You must use this space exclusively for business. You can use a corner of your kitchen table to claim the home office discount.
Meals
Business related meals are tax deductible. This means if you meet with a client for coffee or lunch or have meal expenses while traveling for business, the cost of the meal is deductible up to 50%. The meal cannot be extravagant nor can you deduct the cost of the lunch you eat alone at your desk.
Travel
If your business takes you on the road, you can deduct the cost of your travel. This includes vehicle rental expenses, airfare, hotel accommodations, and other related travel expenses.
Self Employed Tax
If you are self-employed, you will probably owe self-employed taxes. These account for both employer and employee portion of social security and medicare taxes in the amount of 15.3%. Half of your self-employed taxes are tax-deductible because that’s the employer portion of your tax obligations.
Tax Deductions Worksheet
Knowing which tax deductions apply to your business is important. You don’t want to leave any money on the table. This worksheet can help you with preparing your Schedule C.
Other Self Employed Tax Considerations
Taxes are complicated, especially for self-employed contractors. There’s no universal rule for taxes, so you need to look at all your options. Different tax strategies offer different benefits and downsides. Here are some other tax considerations you need to think about.
Estimated Taxes for Wage Earners
Estimated taxes can be confusing for many, so many taxpayers prefer to avoid them. W2 wage earners can avoid paying estimated taxes if they’re gainfully employed. Regular wage earners can increase their paycheck withholdings to cover their estimated tax payments. Using this practice, wage earners can cover their estimated tax payments with these additional withholdings.
Filing Jointly With a W2 Earner
Married couples need to put some consideration into the best filing option. You and your spouse have the option to file jointly or separately. Filing jointly usually reduces the year-end tax burden, but it’s not always the best option.
Estimated Taxes
Self-employed workers need to pay estimated taxes on their income. You could be liable for penalties and fines if you don’t pay on time, so make sure you make your payments. The government wants their money, so you should give it to them or you risk running into problems.
Leveraging Deductions With Income
The IRS limits the amount of some of the deductions you can take based on income limits. For example, certain taxpayers can deduct medical expenses that exceed 7.5% of their income. As a result, higher-income earners get smaller write-offs for these types of deductions.
Self Employed Tax Help
Many taxpayers have problems with their taxes, but self-employed contractors face even more challenges. However, consulting with a tax advisor can make tax time much easier. A tax pro can save you time, money, and stress. Best of all, they can show you how to maximize your deductions and minimize your tax bill. Schedule a one-on-one strategy session with one of the pros at Shared Economy Tax today to see how we can help you get organized for tax time. Click here to get started, and don’t forget to subscribe to our newsletter for more self employed tax tips.