Tax season is often a trigger for headaches, confusion and spending hours sifting through a plethora of confusing forms. If you’re self-employed, filing taxes can be even more confounding. Make your life easier by discovering how much you can expect to pay in taxes each year as well as which forms you need to fill out. To decrease the risk of filling out the wrong forms, consider consulting a tax advisor for your specific circumstances.
Self-employed tax: How much you can expect to pay
Self-employed individuals must pay a two-fold tax. The first tax is self-employment tax (or SE tax). The self-employment tax rate is 15.3% of your profit. So, if you know your estimated annual income, you can figure out what amount the 15.3% translates to.
Income tax: How much you can expect to pay
Self-employed individuals must also pay income tax. The IRS states that you must file income tax if your net annual earnings total $400 or more.
Even if you make less than $400 during a given year, still file the income tax form to get deductions for certain out-of-pocket business costs. Tina Orem, contributor for Nerdwallet, states that you can apply for tax reimbursements for certain expenses like mileage (for meeting with clients), health insurance premiums, and part of your mortgage or rent (if you work from home or use part of your home as your workplace).
How much should you plan on spending for income tax? Miriam Caldwell, contributor to TheBalance.com’s Getting Started with Money section, recommends that self-employed individuals set aside 30% of their yearly income for taxes. If your place of residency requires state taxes, consider saving more than 30% for taxes. (The following seven states do not require state income tax: South Dakota, Nevada, Wyoming, Texas, Florida, Alaska and Washington.)
How to pay SE tax
If you owe less than $1,000 in taxes each year, simply file your SE tax yearly. Self-employed individuals need to fill out the regular 1040 tax form as well as an additional form called Schedule C or Schedule C-EZ. Which one you need is determined by a variety of factors.
Schedule C-EZ is similar to the IRS form 1040 EZ, in that it is meant for simple income and basic deductions. Fill out Schedule C-EZ if you have less than $5k in business expenses, only had one business and no employees and do not have an inventory of items.
The Schedule C form is for everyone else that does not meet the criteria for Schedule C-EZ. Schedule C is essentially a more detailed version of the Schedule C-EZ.
If you owe more than $1,000 in estimated taxes each year, you will have to file your SE tax by filling out a Form 1040-ES each business quarter. Use the IRS’ Estimated Tax worksheet found in Form 1040-ES to find out if the IRS requires you to file quarterly estimated tax or not. If you do need to pay quarterly estimated tax, simply fill out a new 1040-ES form each quarter and submit payments via the IRS’ online Electronic Federal Tax Payment System (EFTPS).
How to pay income tax
Whether you must fill out a Schedule C or Schedule C-EZ form or the quarterly 1040-ES form, all self-employed individuals must fill out the traditional 1040 tax form each year. Make sure to report both self-employed earnings and file your income tax form each year and you will be set for tax filing success.
Tax season is only a headache if you have a lack of tax filing knowledge. With these tips, filing your self-employed and income taxes will be a breeze. Speak with your tax advisor about your specific circumstances to check you are filing correctly.