When you’re self employed, paying taxes can be a little more of a process than just filing income tax once a year while working in a designated company. As a self-employed person, it is crucial to file the necessary tax forms and make quarterly tax payments throughout the year, based on your specific circumstances.
While the freedom of being a self employed individual can be highly lucrative, it comes with the sole responsibility of paying taxes. Along with income tax, you may be required by the state government to collect and pay sales tax. It is a state-mandated surcharge that significantly varies from state to state. Therefore, business owners and independent contractors are advised to check with their state government to see if they are required to charge customers sales tax for specific products or services they offer to their clients.
Regardless of whether you classify as a sole proprietor, partnership, or corporation, all individuals are required to pay estimated federal and state taxes on profits earned through self-employment.
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How to File Tax as Low Income Self Employed Individuals
Important things to remember when filing federal and state taxes for self-employed individuals with low income:
Determine if You Qualify as Self Employed
According to the IRS, you will be qualified as self employed if:
- You conduct a trade or business as a sole proprietorship or as an independent contractor.
- You are a member of a partnership conducting a trade or business
- You are part of your own business, including a part-time business or gig work for yourself.
- If you do any kind of freelancing work outside of your salaried job, you will still qualify as self-employed.
Keep a Record of All Your Earnings Statements
If you have carried out freelance work worth $600 or more for a client, you will receive a Form 1099-NEC from them. Keep a track of all the earning statements and file them accurately in different forms you receive during the 2023 tax season from various clients, depending on the work you provided. It will help you in tallying up the total payments so that you know exactly how much you have earned throughout the year and how much you owe federal and state agencies.
Collect All Receipts/invoices of the Money You Spent for Your Business/freelance Work
If you are self-employed, you must save all supporting documents of your business transactions during the year. Keep sales slips, paid bills, invoices, deposit slips and canceled checks in order along with other expenses such as business-related travel and transportation to write them off while filing for a return.
Use the Right Forms
Most freelancers likely fill out these three forms:
- Form 1040 is the individual tax return form used by self-employed individuals to report their net earnings. This form determines the amount of tax owed or the refund due to the self-employed.
- Schedule C is necessary for reporting the profits or losses from self-employment. With accrued expenses of $5,000 or less, you can also be eligible for Schedule C-EZ short form.
- Schedule SE for Form 1040 is required to report Social Security and Medicare taxes.
Complete All Your Forms and File Your Self Employment Taxes
The IRS may mandate you to make quarterly tax payments on the entire income you earn throughout the year. This is called estimated tax. If you cannot pay your estimated taxes in one lump sum in the first quarter for any reason, you can pay it with vouchers on Form 1040-ES.
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How to File Tax for Free as a Low Income Self Employed Individual?
While you can’t avoid paying taxes that you owe to the IRS, you can certainly avoid paying hefty fees to tax professionals and companies while filing your tax return.
Numerous free resources, both online and offline, are available to assist low and moderate-income taxpayers, self-employed individuals, and those aged 60 and older in filing their taxes without charge.
Two of the IRS’ leading free tax programs include Volunteer Income Tax Assistance and Tax Counseling for the Elderly. Volunteer Income Tax Assistance is for those earning less than $60,000 a year, have a disability or having limited English proficiency. Tax Counseling for the Elderly is for taxpayers 60 and above who need assistance with retirement and pension-related questions.
The IRS calls on taxpayers to keep their Social Security card, photo ID and wage and earning statements, among other items handy while filing their tax return.
If you feel like working on your taxes from the comfort of your own home, you can opt for IRS Free File. But, it has a higher income cap (worth $73,000) than Volunteer Income Tax Assistance and provides limited one-on-one attention to those in need.
You can also choose a private channel through the Beem which allows users to file their taxes for free this tax season. Beem’s free tax filing platform is for all people, including gig workers, low-income self-employed people, single moms, and small business owners. Users can opt for free federal and state tax filing for low income self employed persons or for any combination of forms and filing statuses.
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What Taxes Should You Pay as a Low Income Self Employed Person?
When you work for a company, both you and your employer pay Social Security and Medicare taxes. However, as a self employed person, these taxes become your responsibility alone. The IRS has set the current self employment tax rate for Social Security at 12.4% and for Medicare at 2.9%. Remember, these taxes are different from your regular income tax.
Self employment tax is a federal tax. There are no individual state self employment taxes. As a result, your self employment tax by state will remain the same no matter where you live.
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Deductions for Self Employed Individuals
As a self-employed person, you can make the most out of various self employment tax deductions. These will help you manage your taxes better and reduce your tax burden. Some common deductions to keep in mind while filing self employment taxes include:
- Self employed SEP, SIMPLE and qualified plans
- A portion of your self employment tax can be adjusted according to your gross income.
- Self employed health insurance deduction
- Home office expenses and business-related travel and transportation costs among others.
Free federal and state tax filing for low income self employed individuals or freelancers can be stressful and time-consuming. At the same time, filling out several self-employed tax forms can be confusing for a first-time tax filer. However, a low income self employed individual can take advantage of deductions. They should understand what will reduce their tax burden and grow their business at the same time. Invest appropriate time to claim all of your deductions in order to pay less in taxes. Use platforms like Beem to file your taxes for free.