Who is Self-Employed?
According to the IRS, generally a person is considered self-employed if any of the following apply to you.
1) If you are engaged in a trade or line of business as a sole proprietor or as an independent contractor, that is, you will receive a 1099 at the end of the year.
2) If you are a member of a partnership whereby you’ll receive a K1 from the business at the end of the year.
3) If you are otherwise engaged in any business venture for yourself, this includes any part-time business gig.
If you made or received a payment as a small business or as a self-employed person, you are generally required to file an information return to the IRS.
What are My Self-Employed Tax Obligations?
As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly. This is similar to the scheme that exist for an employed person whereby tax is withheld from their paychecks every time they are paid.
Unlike an employed person, self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. It should be noted that in general, anytime the wording “self-employment tax” is used, it only refers to Social Security and Medicare taxes and not any other taxes like income tax.
Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business operations. This is done by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040.
You are required to file an income tax return if your net earnings from self-employment (excluding church income) were $400 or more or if you had church income of $108.28 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the instructions to Form 1040.
It is important to note that the self-employment tax rule is applicable irrespective of the age of the tax payer or even if the tax payer is already receiving social security or Medicare benefits. The SE tax rate on one’s earnings is calculated at 15.3% (12.4% social security tax plus 2.9% Medicare tax).
Also of importance is the fact that the maximum earnings subject to SE tax is the first $118,500 of your combined wages, tips, and net earnings in 2016.
All your combined wages, tips, and net earnings in 2016 are subject to any combination of the 2.9% Medicare part of SE tax, Medicare tax, or Medicare part of railroad retirement tax.
If wages and tips you receive as an employee are subject to either social security or the Tier 1 part of railroad retirement tax, or both, and total at least $118,500, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings. Deduct one-half of your SE tax as an adjustment to income on line 27 of Form 1040.
If you are married filing a joint return and your income exceeds $250, 000, if you are single and your income exceeds $125, 000 or you are head of household or qualifying widow(er) earning is over $200,000, an additional Medicare tax of 0.9% may apply. The threshold amount for applying the Additional Medicare Tax on the self-employment income is reduced by the amount of wages subject to Additional Medicare Tax (but not below zero) if you have both wages and self-employment income.
Making My Quarterly Payments?
Because of your self-employed status, estimated tax is the method used to pay Social Security and Medicare taxes and income tax this is due to the fact that you do not have an employer withholding these taxes for you. Form 1040-ES is used to figure these taxes and basically contains a worksheet that is similar to Form 1040. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.
Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax.
Blank vouchers are also included in Form 1040-ES that you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.
Filing My Annual Return?
In-order to file your annual tax return, you will need to use Schedule C or Schedule C-EZ to report your income or loss from any business you operated or a profession you practiced as a sole proprietor. Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. To find out if you can use Schedule C-EZ, see the instructions in the Schedule C-EZ form.
In order to report your Social Security and Medicare taxes, you must file Schedule SE Form 1040, Self-Employment Tax. Use the income or loss calculated on Schedule C or Schedule C-EZ to calculate the amount of Social Security and Medicare taxes you should have paid during the year.
User | 26/11/2017