Estimated reading time: 3 mins
The number of self-employed individuals is on the rise these days because people like to be their own bosses. Being self-employed gives you all the freedom you want but there is no way you can avoid taxes. Even if you are not in a job or running a corporation, you are still making money. Obviously, you will have to pay tax on your earnings. Financial literacy is the key because it makes you aware of your tax liability. If you are aware, you will probably file your returns and pay taxes well in time. This means that the IRS will not approach you for the wrong reasons. So here is everything that you need to know about taxes for the self-employed.
Self-employment tax obligations
First things first, you need to understand whether you come into the category of self-employed individuals. Here is the IRS classification of self-employed individuals:
- People who carry on a business or trade as a sole proprietor, freelancer or independent contractor
- Anyone who is a member of a partnership which carried on a business or trade
- Anyone who runs own business, including a part-time business
If you come to any of these categories, you must take your taxes into account while setting the pricing of goods or services you deal with. Bear in mind the tax burden while planning your finances for the year and keep a record of your business expenses that you can claim as legitimate deductions at the end of the year.
Gearing up for taxes as a self-employed individual
Now that you know that you come under this category, the next step is to get ready for filing and paying your taxes. You can start by getting a tax ID number, which should preferably be separated from that of your business. If you run a home-based business, you should understand the basics of home office tax deduction. Primarily, you can claim this deduction if you have a place that you dedicatedly use only for business purposes. Here, it becomes important to claim deductions that are only legitimate because you may get into trouble with the IRS otherwise.
Filing and paying your taxes
Self-employed individuals need to file a Schedule C (Form 1040) tax return if the net earnings from self-employment exceed $400. You have to file a return even if your net earnings are less than $400, in case you meet any other requirements that are listed in Form 1040. According to the norms of the IRS, self-employed individuals expecting to have a tax liability exceeding $1,000 must pay up their estimated tax on a quarterly basis. If you have any doubts about tax filing and payments, it is best to seek advice from tax attorneys who make a difference because getting in trouble with the IRS is the last thing you would want to do. A seasoned attorney can help you deal with these concerns and also guide you about deductions and tax calculations.
Know tax deductions well enough
Like any other taxpayer, self-employed individuals can also claim certain valid tax deductions. The catch is to know them well enough so that you claim only the ones that are legitimate in your case. As already discussed, you can claim home office deduction if you use a part of your living space solely for your business. Another common deduction for self-employed individuals is automobile expenses. For claiming this deduction, you need to validate that you are using the vehicle for business-related purposes. A written log of business miles is needed to calculate the deduction amount using the standard mileage rates. Other deductions that you can claim as a self-employed taxpayer include health insurance premiums, travel expenses, office supplies, and travel expenses.
Be aware of your responsibility
As a self-employed individual, the responsibility of filing and paying your taxes is totally yours. This may be a small price to pay for the freedom you have but you should not overlook it at any cost. Knowing how much to pay and when to pay is crucial and so is staying on track with the deadlines. At the same time, you should be in touch with a tax attorney who plays an advisory role because self-employed taxes can often be confusing. Moreover, a lawyer can also help you with resolving any issues or disputes with the IRS if you come across them at any point in time. Obviously, this will keep you stress-free about your tax matters as you have an expert to show you the way.
