Unlike company employees, self employed people don’t get taxes automatically deducted from their paychecks at the end of their salary cycle. Therefore, it is up to them to keep constant track of their income and taxes to avoid any problems in the future.
As per the Internal Revenue Service (IRS), self employed individuals, business owners and freelancers must comply with the tax law in accordance with the nature of their business.
Taxes for Self Employed Individuals
Filling out government forms and the entire taxation process can certainly be daunting. Here are some tips and tricks to help in filing, paying and saving taxes for self employed individuals in the USA for the 2023 tax season.
Self employed individuals are classified into the following categories as per the IRS:
- Independent contractor or sole proprietor of a business entity.
- Member of a partnership or limited liability company (LLC) that carries on a trade or business.
- Someone who is in business for themselves (including a part-time business).
Over 15 million Americans are self employed and have to pay self employment as well as income tax.
Also know about: How to File Taxes as a Freelancer
How is Self Employment Tax Calculated?
If you are employed by a registered corporation, certain taxes like Social Security and Medicare taxes are divided between the employee and the employer. However, when you are not an employee of a company, you are responsible for paying the entire tax to the government.
Currently, the self employment tax rate is 15.3%. It is the sum of 12.4% for Social Security and 2.9% for Medicare.
This guide for filing self employment tax in the USA will help you understand the process better.
Are Self Employed People Required to File Taxes?
According to the IRS, self employed individuals must file an annual return as well as pay an estimated tax quarterly if their net earnings throughout the year from self employment was $400 or more.
When you are self employed, you have to pay the same income tax as a normal taxpayer working for an employer and earning a paycheck or wage. However, the only notable difference is that when you are working for yourself, no employer will automatically withhold certain taxes with every paycheck. As a self employed individual, the onus falls on the sole taxpayer.
Note that there are some tax advantages for a spouse-run business. The Small Business and Work Opportunity Act of 2007 allows a business run by a husband and wife to not be treated as a partnership for federal tax purposes. With this act, each spouse is a sole proprietor and can divide all income, losses, profits, credits and tax deductions between each other based on their respective interests in the business.
Self employed individuals, including freelancers, must manage their taxes while setting their pricing and ensuring consistent financial planning throughout the year. This will help them in saving money and reinvesting the same money in their own business development.
Before you can confirm your tax obligations, it is crucial that you know your tax rate and assess whether your state/region requires additional taxes.
How to File Self Employment Taxes for Free
You need not worry about how to file tax returns for the self employed. In order to effectively prepare your tax filing for self employed, you must understand your tax rate first. This includes any federal, state or local taxes that might apply to you. You can determine your tax rate by understanding your net profit or loss during the taxable period. This will help you to file self employed taxes for free.
If you earn over $400 annually from self employment, you should fill a Schedule C (Form 1040). Even if your net earnings from self employment are less than $400, you still have to file a return to meet the requirements listed in Form 1040. Other forms to keep in mind for self employed individuals include Schedule 1 and Schedule C and others like Schedule 2, Schedule SE, Form 4562 and more. Schedule SE is a must if your self employment income minus expenses comes up to at least $400.
Remember, tax filing for self employed people will never be reported on a W-2 as there is no W-2 self employed specific form that you can generate from the federal agency.
The IRS further calls on self employed taxpayers who likely owe over $1,000 in self employment tax to make estimated tax payments four times during the year. To file the annual tax return, a self employed individual must use Schedule CPDF to report their income or loss from a business in which they operated or a profession in which they practiced as a sole proprietor. Failing to make periodic payments or underreporting your income can result in penalties and interest.
When you work for yourself, it can be a challenging and tiresome task to do your taxes in the midst of a bazillion other things to manage. However, you can simply go to Beem to handle your tax return in the current tax season. The Beem app is a highly productive tool to help with income tax filing for the self employed. Estimate your Federal and State taxes with Beem’s free Tax Calculator. Enjoy online tax filing with our 100% accuracy and get the maximum refund. Get started now.
Why Free Tax Filing is Beneficial for Self Employed Individuals
Doing taxes is among the most difficult challenges self employed workers face currently. It is such a tedious task, that more than a third of freelancers don’t even bother to pay their taxes, according to a QuickBooks survey of 500 freelancers.
Since tax evasion is a felony, it is in your best interest to file your taxes on time every year. Filing your taxes for free through federal channels is the best way to avoid costly penalties and interest. While you could go to a Certified Public Accountant to take care of your tax returns, their fees could burn a hole in your pocket as a self employed individual.
You can opt for a simple free tax program or application and avail the benefits of possible deductions.
How You Can Save on Tax Filing for the Self Employed
Here are a few ways you can write off taxes while filing for a return this tax season as a self employed taxpayer:
1. Startup costs: If you recently launched a new business, you can get deductions in the form of startup costs from your tax bill. Such costs include legal fees, advertising and marketing costs, etc..
2. Home office deduction: You can deduct your home office if you are using a dedicated space for work-related tasks only. In order to do so, you must measure the square footage of your home office. This is to affirm how much of the house you can deduct for rent, mortgage payments, utilities and property taxes.
3. Supplies and equipment: You can get deductions on any office supplies or equipment for the operation of the job.
4. Social Security and Medicare taxes: Self employed people must also pay the full Social Security and Medicare tax. However, they can write off a part of it at the end of the financial year.
Tips for Filing Taxes for Self Employed Individuals
While filing your taxes, it is a good practice to be organized. Here are some tips for filing taxes for self employed individuals in the US:
- It’s a good practice to have separate personal and business accounts. Keeping your business accounts separate from your personal accounts will help in smooth operations and financial management.
- The IRS likes you to pay quarterly, so it’s a good idea to make quarterly payments. In some cases, you can end up paying a penalty if you don’t make certain quarterly payments. Filing self employed taxes for free cannot get easier than this.
- A major self employed tax tip is to set aside money every month. This helps to make those required quarterly tax payments more manageable.
- If you live in a state that has its own income tax policy, you could find yourself paying more. Keep a check of the tax rules in your state before planning your return filing.
- Understand the tax implications of your business venture or freelance job.
- Consider hiring someone to help you in preparing your taxes. They can also help in availing the best benefits of these tips for filing self employed tax returns.
Deadline for Paying Taxes
For your 2022 taxes, the IRS tax deadline is on April 18, 2023. If you skip making a quarterly payment or pay late, you may be subject to a penalty. Here are the 2023 quarterly estimated tax deadlines:
- 1st Quarter (January 1 – Mar 31, 2023): April 18, 2023
- 2nd Quarter (April 1 – May 31): June 15, 2023
- 3rd Quarter (June 1 – August 31): September 15, 2023
- 4th Quarter (September 1 – December 31): January 16, 2024
Though the benefits of a self employed lifestyle can make anyone jealous, the increased burden of tax preparation can be a major challenge. Therefore, cover all your bases, consult necessary experts and take advantage of all possible tax deductions to get maximum profits. Make sure to download the Beem App from Apple Store or Google Play Store. This will help make tax filing for self employed people an easy process.