Startup Tuesday: Tax Returns for the Self Employed
Posted by Megan Webb-Morgan on April 2, 2013 in Business Financing, Startups [ 0 Comments ]
Nearly 10 million Americans were self-employed by the end of 2012 according to the US Small Business Administration.
There are a number of misconceptions about what forms are needed to file self-employment taxes, when those taxes are paid, and who is required to pay.
According to the IRS, you are self-employed if you run a business or carry on a trade as a sole proprietor, independent contractor, or member of a partnership. As such, you are required to file forms with your annual tax return that reports your self-employment intern. You are also required to pay taxes on your self-employment income on a quarterly basis.
You must file an income tax return if your net earnings from self-employment were $400 or more. You may have to file a return on earnings less than $400 if you meet other filing requirements in the instructions on the 1040 form. The forms you will have to submit to the IRS include:
- Form 1040-ES, Estimated Tax for Individuals. Contains a worksheet similar to the Form 1040 that helps you determine whether you are responsible for paying quarterly taxes.
- Schedule SE, Self-Employment Tax: Used to report your Social Security and Medicare taxes. Whereas employees have these taxes deduced from each paycheck, as a self-employed person you will pay them each year with your annual return.
- Schedule C or Schedule C-EZ: Used to report your business’s income or loss with your annual tax return. If your expenses are less than $5,000 you may be able to use the less complex Schedule C-EZ.
Calculating and Paying Taxes
First, you need to determine your net profit or loss from your business by subtracting your business expenses from your income. You must report your profits as part of your income, but can also deduct your loss from your gross income (subject to limitations).
When you pay quarterly taxes with the 1040-ES form, you are in fact paying estimated taxes on your income for the upcoming quarter. This means you may estimate your taxes to be too high or too low. Should this occur, you need to fill out another 1040 form to reconfigure your tax obligation for the next quarter. For example:
- I estimate that my tax obligations for Q1 will be $100. However, I make less than I expected, and my actual obligation is $125. I will fill out another 1040-ES form by the due date in order to ensure that I have fulfilled my tax obligations for the quarter, or be subject to penalties.
The specific due dates for each quarter are: April 15, June 15, September 15, and January 15.
Misconceptions and Special Considerations
Some business types require extra forms in addition to the 1040-ES, Schedule C, and Schedule SE. They may also have different financial obligations. Be sure to read through the Form 1040-ES to determine which forms you need and what rules apply to your business.
- If you worked as a consultant and did not receive a Form 1099-MISC, you still need to report your income to the IRS.
- The IRS requires you to report all of your income, no matter how small. Furthermore, filing a return enables you to gain access to tax deductions and credits that you may qualify for.
- Most self-employed persons have a very low risk of being audited. Red flags that may trigger an audit include: home office space deductions; meals, travel, and entertainment deductions; writing off a vehicle; consecutive years of income loss; hiring family; and income disproportionate to lifestyle.
When you’re self-employed, you need to make sure that you report to the IRS any income or losses from your business. The instructions for Form 1040-ES are extremely helpful in calculating your tax obligations, determining whether you owe quarterly taxes, and helping you find credits, deductions, and exclusions that apply to your business.
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