Starting a small business and being self-employed can give individuals an opportunity to build wealth and a great way to save on taxes. However, this opportunity also comes with great responsibility; such as ensuring total compliance with the tax rules and regulations surrounding self employment.
Self-employed individuals normally earn income by carrying on a trade or business. You are considered self-employed and subject to self employment tax if you:
- are a sole proprietor
- are an independent contractor
- carry on your own trade or business
- have a profit motivation for your business activity
- operate your business in a regular manner
- work full or part-time in the business venture
- have a net profit of $400.00 or more
Important Tax Tips for the Self-Employed
- Self-Employment Income. The income you received for a part-time business in addition to your regular job or business may be self-employment. Taxes can be complex for the self-employed. When you have more questions than answers, please call for help.
- Estimated Tax. Self-employed taxpayers generally need to make quarterly estimated tax payments. As a self-employed individual, you generally have to make estimated tax payments if you expect to owe taxes of $1,000 or more when you file your return. If you do not pay enough tax throughout the year, you may owe a penalty. Checkout Estimated Tax Payments for details on making estimated tax payments. Please call if you are not sure whether you need to make estimated tax payments or need help setting up EFTPS.
- Schedule C or C-EZ. Self-employed individuals must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040. If you operated more than one business as a sole proprietorship, you must attach a separate Schedule C for each business. For expenses less than $5,000, use Schedule C-EZ. Not sure whether you can use any of the forms? Please call for help!
- Self-Employment Tax. The earnings of individuals who are working as independent contractors are subject to self-employment tax. For those making a profit, self employment and income tax may need to be paid. The tax is 15.3% of net earnings, comprised of two components – a 12.4% for Social Security tax and a 2.9% for Medicare tax. You can use Schedule SE, Self-Employment Tax, to figure the tax.
- Allowable Deductions. As self-employed individuals, you can deduct expenses paid to run a business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in the industry. A necessary expense is one that is helpful and proper for a trade or business.
- When to Deduct. In most cases, you as a tax-filer can deduct expenses in the year paid or incurred. Some costs must be ‘capitalized,’ however. This means deducting the cost over a number of years.
Still have questions or concerns about Self-Employment taxes and filing accurate tax returns? Adachi Financial Services Tax Reps are available to direct your call.