Are you self-employed? Being your own boss comes with tons of perks and a satisfying feeling of freedom. However, you will have to be mindful of self-employed income tax, which is often more complicated than most freelancers realize.
Read our simple guide below on taxes during self-employment!
Self-Employment Tax Basics
If you are self-employed, you have to take your taxes into account when planning the prices of your products or services. Moreover, you have to plan your own business expenses and balance them against your plans for saving money.
The IRS classifies self-employed citizens into three categories:
More than 1 in 20 Americans is self-employed. All self-employed citizens are expected to pay the usual income tax, as well as a specific self-employment (SE) tax.
Self-employment tax includes medical care and social security tax for sole proprietors and independent contractors.
Determining Your Self-employment Tax
In order to determine the size of your self-employment tax, you have to calculate the net profit (or the net loss) of your operations. Depending on the nature of your self-employment, you might be able to do so just by simple subtraction.
If after subtracting your business expenses from your business income, you have more than $400 in net earnings, you have to file a Schedule C (Form 1040) income tax return. This form covers numerous additional tax credits, including premium credit, child credit, health coverage credit, and credit for federal tax.
Tax Breaks and Deductions
As a self-employed individual, you are taxed only on your net income. This means that you can deduce all your business expenses directly against your income. The expenses you can legally deduce include:
Since 2018, pass-through business owners can also claim the much anticipated 20% pass-through tax deduction. Any business where profits and losses go through the owner’s personal tax returns are pass-through businesses.
The pass-through tax deduction allows small business owners to reduce their taxable profits after deducting business expenses by an extra 20%. This is big news for small business owners and independent contractors with limited working capital.
In addition to the usual tax deductions and the new pass-through tax deduction, you may also opt to reduce your tax liability through tax donations. This is often a complex process, so check out more of our website to learn more about reducing your tax liability through charitable donations.
Liked Our Self-Employed Income Tax Article? There’s More!
Now that you know the basics of self-employed income tax, it’s time to boost your frugal fiscal fitness! Work from home the right way, with proper financial management.
Come on in and browse numerous categories full of actionable financial advice! From cryptocurrency and stocks to coupons and frugal living tips, we offer you the know-how to take control of your financial future. So, get started today here on Frugal Finance!
Self-Employment Tax Basics
If you are self-employed, you have to take your taxes into account when planning the prices of your products or services. Moreover, you have to plan your own business expenses and balance them against your plans for saving money.
The IRS classifies self-employed citizens into three categories:
- Sole proprietors and independent contractors
- Individual members of a trade or business partnership
- Part-time business members, or people otherwise engaged in business for oneself
Self-employment tax includes medical care and social security tax for sole proprietors and independent contractors.
Determining Your Self-employment Tax
In order to determine the size of your self-employment tax, you have to calculate the net profit (or the net loss) of your operations. Depending on the nature of your self-employment, you might be able to do so just by simple subtraction.
If after subtracting your business expenses from your business income, you have more than $400 in net earnings, you have to file a Schedule C (Form 1040) income tax return. This form covers numerous additional tax credits, including premium credit, child credit, health coverage credit, and credit for federal tax.
Tax Breaks and Deductions
As a self-employed individual, you are taxed only on your net income. This means that you can deduce all your business expenses directly against your income. The expenses you can legally deduce include:
- Work equipment
- Office rent
- Advertising expenses
- Automotive expenses
- Certain house-related expenses (if working from home)
The pass-through tax deduction allows small business owners to reduce their taxable profits after deducting business expenses by an extra 20%. This is big news for small business owners and independent contractors with limited working capital.
In addition to the usual tax deductions and the new pass-through tax deduction, you may also opt to reduce your tax liability through tax donations. This is often a complex process, so check out more of our website to learn more about reducing your tax liability through charitable donations.
Liked Our Self-Employed Income Tax Article? There’s More!
Now that you know the basics of self-employed income tax, it’s time to boost your frugal fiscal fitness! Work from home the right way, with proper financial management.
Come on in and browse numerous categories full of actionable financial advice! From cryptocurrency and stocks to coupons and frugal living tips, we offer you the know-how to take control of your financial future. So, get started today here on Frugal Finance!
