How To Do Taxes When Self Employed
How to Do Taxes when Self Employed – Top 3 Tips
With the massive loss of jobs due to the pandemic, many individuals joined the ranks of the self employed. They became known as gig workers such as an Uber driver, Instacart shoppers, delivering for Amazon, and many others. It meant you had to know how to do taxes when self employed, and these taxes became a little more complicated.
If you worked for an employer at their office, for instance, all required taxes were withheld from your pay and sent in to the government agencies by the employer. As a freelancer/gig worker, you’re considered to be self employed, and you now have to pay the required taxes in yourself.
As an independent contractor, you need to make an estimate of the taxes you owe as you earn it. These taxes are sent in to the IRS and your resident state four times a year as estimated tax payments. The dates due are April 15, June 15, September 15, and January 15.
How to do taxes when self employed is confusing to many
Even with so many from our work force employed as independent contractors, many aren’t aware of the tax implications for gig workers. This type of work was being done before the pandemic, however, not to the extent it now is.
A survey done about a year ago revealed about 59 million Americans, or about 36% of the total labor force, were employed as freelancers/independent contractors during that 12 month period. Covid-19 lockdowns caused a big change in the make up of the freelancers.
Millions of people were forced to quit because of lack of work or fear of contracting the deadly virus. While this was going on, many others became freelancers for the first time in their lives. This was caused by a huge demand for home delivery by many of us.
How to file taxes as self employed
As a regular employee you get a W-2 in January from your employer that shows your earnings and all of your tax withholdings. If you’re self employed, you will usually get a form 1099-NEC that shows the gross amount of your earnings from a firm you worked for.
You need to be aware, too, that most firms that you work for, who haven’t paid you at least $600 during the year, won’t send you a 1099 form. However, you’re required by law to report that income to the IRS. The IRS requires you to file a tax return as long as your total gig income was $400 or more.
If you hire someone to help you in your gig, who performs a service, and you pay him $600 or more during the year, you’re required to send him a Form 1099-NEC. The deadline for sending the form to this person is February 1. You also send the same type of form to the IRS by the end of February.
Another requirement for self employed people is that you have to pay FICA and Medicare taxes on the net profit of your business. This is usually referred to as self employment tax. A person that is an employee of a company and receives a W-2, pays 7.65% of his earnings. As a self employed owner, you have to pay the entire 15.3%.
As a self employed independent contractor, your business income and expenses are reported on a Schedule C on your personal tax return. Some of the expenses that you are able to deduct, as long as they are considered by the IRS, to be ordinary and necessary, are: telephone, travel, home office, internet, and many more.
For use of your personal vehicle, you are required to maintain an accurate log, detailing each time it is used. The same rule applies to a cell phone. I’ve never heard of anyone keeping a detailed log of it’s use, but try to get an accurate estimate of the percentage of business use. Don’t do what many do and use 100% of the cell phone bill. You’re asking for trouble.
Another deduction available to you is 50% of the self employment tax paid. It isn’t deducted on Schedule C, but is deducted as a subtraction to gross income.
You can deduct retirement contributions too, but not Roth accounts. They are also deducted as adjustments (subtractions) to gross income.
Online tax filing for self employed people
If you’re doing taxes yourself for the first time, this may seem overwhelming. However, if you have a very simple Schedule C for your gig work, you probably can handle it on our online tax filing site yourself.
If your business grew fast during the year, and you have some unusual type transactions, you might want to consider using a tax professional. It may be that you’ll benefit more by incorporating.
In any event, if you owe taxes on your tax return, and are short on cash, the IRS has payment plans to repay it over the next 12 months. File your return on time whether you can pay the tax or not. The penalty for paying the tax late is much less than the penalty for not filing a tax return.
Doing taxes by yourself is not difficult at our site. Just answer the simple interview questions, enter your tax data, review the return, and then file it electronically. Knowing how to do taxes when self employed is not required, you’ll find that our program will take care of it all for you.