Filing if You’re Self-Employed
Being selfemployed has many benefits — until tax time comes.
Working for yourself means you’ve got to shoulder more responsibility to keep your taxes organized and paid on time. Self-employed individuals include sole proprietors, independent contractors, members of business or trade partnerships, and part-time business owners. Some 15 million Americans fall into these categories, according to Pew Research.
Unlike selfemployed individuals, W-2 works have taxes automatically deducted from their regular paychecks. Those who work for themselves have to keep track of what is owed, and then pay on time. Take-home pay will be higher to the self-employed, but a portion of that money must be set aside to cover the eventual tax obligation. The forms are different, and that in itself can be daunting. So become acquainted with these new wrinkles, or be prepared to pay a qualified professional to prepare your taxes.
YOUR OBLIGATIONS
The self-employed, including freelancers, need to take taxes into account when budgeting or setting up a price structure. Decisions about reinvesting in your company or building up your savings must take into account this accumulating annual debt to
Uncle Sam. Track your business expenses monthly in order to make figuring out year-end deductions and tax obligation an easier process. A provided IRS worksheet can help you figure your quarterly taxes.
UNIQUE SELFEMPLOYMENT TAXES
Medicare and Social Security deductions are typically split between the employee and employer, amounting to about 8% of your gross income. The company matches that figure. When you don’t have an employer, however, you are responsible for the entire tax. Most of it goes to Social Security, but the government sets a limit on how much is taxable over the course of the year. All wages above that total, which has been around $137,000 in the past, are exempt. Medicare does not have a cap.
FIGURING YOUR INCOME
Prior to filing, you’ll need to determine if your business had a net profit or net loss. Subtract expenses from your company’s income to reach this figure. The Internal Revenue Service has set a floor for how little you can earn without filing, but you may still have to file an income-tax return if you meet other requirements outlined in Form 1040. Consult a professional accountant and tax preparer if you don’t feel comfortable handling these tasks, or if they’ve become increasingly complicated.