Self Employed Taxes: What You Need to Know
Today’s technology has made it possible for people to work at their own pace, and under their chosen conditions. There has been a noticeable rise in the number of freelancers all over the country, considering the ease by which you can earn money without having to deal with restrictive circumstances. Freelancers enjoy the fact that they are their own bosses, something that has been attracting more and more people out of the traditional workforce setting and into a whole new way of working.
Of course, there are a lot of technicalities that you would have to think about before jumping right into freelancing. Aside from setting up a suitable work area, you would also have to think about how to file self-employed taxes.
Understanding Self-Employment Tax
Simply put, self-employed taxes are filed by people who work for themselves. It’s the same thing as the Social Security and Medicare taxes that any regular company used to take out of your salary when you were still working for them. This time, it’s not anybody else’s responsibility but your own.
In taking care of your self-employment tax, you need a Schedule SE, otherwise known as a Form 1040.
Before trying to figure out how much your self-employed taxes are, make sure you are subject to it. You can check on this by computing for your net profit or your net loss. To do this, you just need to compute for your total business income and subtract your total business expenses from that amount.
In case of a net loss, this can be deducted from your gross income as stated on page 1 of your Form 1040.
Here are a few things you need to know about self-employed taxes:
- The employer-equivalent part of one’s self-employment tax can be deducted when you’re trying to compute for your adjusted gross income, although this will only affect your income tax and not your self-employment tax.
- Filing a Form 1040 Schedule C could qualify you for an Earned Income Tax Credit or EITC.
- Part of the Small Business Jobs Act states that you can deduct a percentage of your income for health insurance purposes. These deductions can be computed using the instructions on your Form 1040 and Schedule SE as guide.
- You are required to pay self-employed tax if you earned $400 and above. If you’re a church worker, your church employee income should be at least $108.28 before you are required to file self-employed tax.
- To pay self-employed taxes, you are required to have a Social Security Number and an Individual Taxpayer Identification Number.
As for the computation of the tax itself, you may refer to the information given on your Form 1040.
Qualifying for an Earned Income Tax Credit (EITC)
Hoping to get a few adjustments made on your self-employed tax? Check if you qualify for an EITC. Here are some of the basic rules.
Your status affects your ability to qualify for an EITC. You may qualify if filing for taxes under the following statuses:
- Married (jointly filed)
- Head of household
- Qualified widow or widower
Take note that if you’re using “Married” as your status, your taxes should be filed jointly. If your taxes are filed separately, it automatically disqualifies you from claiming the credit.
In terms of income, the following rules apply:
- Your tax year investment income should not exceed $3,400 for the entire year.
- There should be no Form 2555 (Foreign Earned Income) or Form 2555-EZ (Foreign Earned Income Exclusion) filed.
- The total income earned must be at least $1.
For those filing under the status of single, surviving spouse or head of household, your adjusted gross income (AGI) and earned income should not be more than the following figures:
- For those with no qualifying children claimed, $14,880
- For those with 1 qualifying child claimed, $39,296
- For those with 2 qualifying children claimed, $44,648
- For those with 3 or more qualifying children claimed, $47,955
For those filing their taxes under the status “Married”, both your adjusted gross income (AGI) and earned income should not exceed the following figures:
- For those with no qualifying children claimed, $20,430
- For those with 1 qualifying child claimed, $44,846
- For those with 2 qualifying children claimed, $50,198
- For those with 3 or more qualifying children claimed, $53,505
Again, remember that you must be filing taxes jointly, and not separately, if you were to take advantage of the credit using the married status.
Understanding Estimated Taxes
Because freelancers are also considered as “self-employed individuals”, there may be a need for you to file Estimated Taxes on a quarterly basis. Remember that when you are earning as a freelancer, your income may not be as regular as a traditional employee. This is why you may be required to pay taxes as you receive income throughout the year.
Estimated taxes are a form of self-employed tax that sorts this out. This takes care of your income tax, self-employment tax, and alternative minimum tax.
Remember that you may be asked to pay penalties if:
- Your estimated tax payments are not enough
- Your estimated tax payments are late
This is why it is crucial to take care of your estimated taxes regularly, regardless if you are expecting a tax refund.
To file for estimated taxes, the Form 1040-ES is used. The figures needed to compute for it are:
- Expected adjusted gross income
- Expected taxable income
- Taxes for the year
- Deductions for the year
- Credits for the year
One great way to compute for your estimated tax would be to look back at last year’s income. This could help you make a close estimate of this year’s figures.
What happens if your estimated taxes do not meet the actual numbers? If your estimated figures are either too high or too low, you can adjust the figures for the next quarter by filing another Form 1040-ES. Remember that there is a specific due date for each payment, so figure that into your own schedule to avoid missing out on payments and ending up with penalties.
Using the EFTPS
Filing for your taxes is now easier because the system has been digitized. The Electronic Federal Tax Payment System (EFTPS) can be used in two ways – via phone using the EFTPS Voice Response System or online. This service is offered for free.
What are the advantages of this new system?
- You can pay your taxes without leaving the house or office.
- You can schedule payments in advance to make sure you do not miss out on deadlines.
- You can keep track of all your tax payments.
Of course, you still have the option of paying your taxes manually if you are more comfortable with this routine.
As a freelancer, it’s understandable that you also have a number of expenses that you would have to think about. This means that not all of your income goes straight to your pockets. A lot of them goes into expenses that allow you to keep working or to keep your business running.
So wouldn’t that be a challenge, knowing that you have to pay for a lot of your business and work expenses on top of your taxes?
The good news is, you can actually deduct some of your expenses from your gross income before computing for your taxes. Here are some of the deductions you can file:
- Dental and medical expenses (if they amount to more than 7.5% of your adjusted gross income)
- Either local and state income taxes, or general sales taxes (only one can be chosen as you deductible)
- Interest and points from home mortgage
- Personal property taxes
- Donations or gifts to charities (the chosen charity must first be qualified)
Remember that when it comes to deductions, you always have two options – to take the amount specified by the IRS, or your actual itemized deductions. Of course, it is always better to use the higher amount between the two.
The deductible expenses discussed earlier are just a part of the total amount that you can deduct from your income before figuring out how much your self-employed taxes are. Your gross income can still be adjusted if you have the following:
- Contributions made to an Individual Retirement Arrangement (IRA)
- Any interest accumulated from student loans
- Payments for alimony
- Moving expenses (considered if you had to relocate to a new location that is at least 50 miles farther than where to used to live for this job)
- Medical insurance premiums
- Half of your FICA taxes (meant for those who are self-employed, which includes most freelancers)
- Tuition and other related fees (except if you have already claimed education credits)
There are restrictions and limits applied to each of these adjustments, so make sure you check these out before filing your taxes. The IRS website would be a good resource for this.
Staying on Top of Things
Taxes are a given, regardless of whether you’re a regular employee or a freelancer who enjoys flexibility. The only difference between the two is that you have to take care of your own computations and payments the moment you decide to go freelance.
But this should not stop you from enjoying the flexibility that only freelancers have access to. Paying taxes can be a challenges at first, especially if you’ve gotten used to a corporate setting where somebody else helps you keep track of everything.
To make it easier for you to adjust in paying your self-employed taxes, keep the following tips in mind:
- Keep track of your numbers.
Don’t wait until it’s time for you to file your taxes before looking for receipts or filing your invoices. The best way to get ready is to go for it day by day. File every receipt and invoice and take clear note of every expense. If you stay on top of your numbers on a regular basis, it will be easier to do your computations when the time comes.
- Prepare early.
Even if your taxes are not due for the next month or so, make sure you start preparing every form and receipt needed. Last minute preparations will only result to miscalculations, which you would have to adjust the next quarter. That means additional work.
- Ask questions.
Taxes are not exactly minor issues you can shrug off. These have a huge impact on your profession, as well as on the way your cash flow works. If you are unsure about anything, find the right people to ask. You can look for an accountant or auditor, or ask someone who has been filing their taxes for a long time. You also have a lot of resources at your disposal. Check out the IRS website or call their hotlines for assistance.
- Use the right tools.
The great thing about filing your taxes today is the fact that there are so any tools you can use. Manual filing is now just one of your options – the EFTPS is one clear proof of that. You can also look for apps or software that can help you keep track of your invoices, expenses, and other numbers that prove to be important for your taxes as a freelancer. Fiverr Workspace, for example, is a seamless way to send invoices and get paid. It’s also a tool you can use to keep track of your expenses, making it easier to check out any tax deductions you can use before filing your taxes.
It may look challenging at first, but you’ll get used to it. Just remember that paying taxes gives you that status of being a reliable, credible and responsible freelancer. It’s not just about following the law. It’s also about having integrity, something that a freelancer must have if you want to succeed and excel without the guidance of a traditional boss.
Miss out on paying self-employed tax and you do not just put your own finances in jeopardy, you also risk losing the opportunity of working with big clients who can give you a bright future in the business.