How Is Self-Employment Income Taxed?
Freelancers and contractors are responsible for calculating their own taxes. This income will need to be declared on their federal tax return with a schedule to show the business income and expenses. Many self-employed in Fairfield County will want to know how they should be taxing their income; some will want to get advice from a company like Ap Accounting and Tax Stamford if they have more complex records. Knowing some basics will help. The difference between an employee and an independent contractor decides which forms are needed; it will tell an individual what forms need to be filled and how the payment will be made. The IRS have guidelines for this.
Self-Employment Tax and Estimated Payments
Most self-employed people will need to pay self-employment tax. This is Social Security and medical care. The total amount will be 15.3% of most of the business owner’s net profit. Some of this amount can be claimed back as a deduction when calculating their income tax. As nothing will be taken from the wages, the self-employed workers will have to pay the estimated tax. This is typically paid 4 times per year (usually April, June, September, January). Underpayment may result in penalties, so many freelancers will set aside some money to pay.
Separating Business and Personal Money
Keeping a separate bank account for business will really help keep track of the finances; this will help one know exactly how much income and expenses are incurred. Also, by keeping this separate, it is much less likely to include personal costs within a business. Many small businesses will just use accountancy software or a simple spreadsheet, but it should be made sure to keep it up to date.
Deductible Expenses and Documentation
Any expenses that are usual and necessary for a business, which will typically include subscriptions, supplies, professional fees and advertising. Self- employed workers may also be able to claim some of the internet and phone costs; having a home office that is used regularly and solely for work may be claimable. All of these will require some form of evidence such as mileage logs, receipts and invoices. Self-employed workers may also be able to claim some equipment such as a computer or camera. This can be claimed over several years or in one year depending on the cost and what is decided.
Retirement Savings and Health Insurance
A self-employed worker may be able to claim some of the contributions that they make to a pension plan (SEP IRA, Solo 401(k), etc.). They may also be able to claim their health insurance premium. However, there are limits to how much they can claim, and this can change. Check with the IRS what the current figures are.
Common Mistakes to Avoid
Common mistakes include forgetting to pay quarterly, claiming personal costs as business costs and not claiming small side incomes, as a self-employed worker won’t have received a Form. Even if they haven’t received a Form 1099, they will still need to pay tax on this income. Some clients won’t give out a Form for smaller amounts. Keeping a running total of all their payments will help.
Final Thoughts
While being self-employed offers one flexibility, there are still tax obligations that an employer would have taken care of by making regular estimated payments and keeping a running total of their income will help avoid most surprises. Whether doing it yourself or using a company like Ap Accounting and Tax Stamford, having regular habits throughout the year will make it much easier.