As a small business owner, you probably have many questions and concerns about your tax obligations. You may have even heard you don’t really need to file an annual tax return as a self-employed individual. However, Credibly has the answer to this question and many more rests within an understanding of filing business taxes for the self-employed.
Who’s Required to Pay Self-Employment Taxes?
If you work for yourself, you have an obligation to pay self-employment tax (SE tax), explains the Internal Revenue Service (IRS). This includes working as a sole proprietor, as an independent contractor, as part of a partnership, or if you have a substantial income from performing services for others. If you are retired, disabled, or receive social security, you must also file SE taxes for any self-employment activities.
Self-employment tax is basically the self-employed equivalent of paying Social Security and Medicare taxes for your income bracket.
How Do Net Losses and Gains Affect Self-Employment Taxes?
You wouldn’t want to pay for something you didn’t purchase. Similarly, you do not necessarily have to pay SE tax if you have a net loss for your business. Prior to filing your return, calculate your net gains and losses by adding together all your income and subtracting your expenses. If your expenses are more than you made, you have a net loss. If you have money left after subtracting your expenses, you have a net gain.
Net loss can be deducted from your gross income if you have another non-self-employed job. If self-employment is your sole source of income, a net gain above $400 is typically when you must pay SE tax.
What’s the Self-Employment Tax?
The SE tax varies for each tax year. In 2014, the SE tax rate was 15.3 percent. 15.3 percent is a combination of 12.4 percent for social security and 2.9 percent for Medicare. Also, a maximum exists for how much self-employment income can be taxed at the combined rate. In 2014, only $117,000 was subject to the 12.4 percent. However, any amount above $117,000 is still subject to the 2.9 percent Medicare tax.
What’s Considered Income For Business Taxes?
Income includes all earned items of monetary value. This includes cash, checks, physical materials, and other payments. If you receive property as payment, you must include the fair market value of the property in your income figures.
Related: A Guide To Sole Proprietorship Taxes
What Are Quarterly Payments for Self Employed?
Since you don’t have an employer to hold taxes for you, you may need to pay quarterly tax payments. If you expect to owe at least $1,000 in SE taxes, you’ll need to make estimated, quarterly payments. If you expect to make more than $150,000 in adjusted gross income, or you plan to have a net gain of more than $150,000, you don’t have to make quarterly payments.
Quarterly payments are due on the following dates:
- April 15
- June 15
- September 15
- January 15
*The monthly dates remain the same for future years.
How Do You Calculate Quarterly Tax Payments?
You can calculate your estimated, quarterly payments with Form 1040-ES. You’ll need last year’s tax return to complete this worksheet. The worksheet takes about 15 minutes to complete. After completing the worksheet, you can tell if and how much you’ll need to pay quarterly.
What About Penalties?
You may have to pay a penalty when filing your annual return if any of the following apply:
- You don’t pay quarterly payments on time.
- You don’t pay enough in quarterly payments to cover your tax for the filing year.
- You don’t increase your quarterly payment if your income increases.
You can avoid the penalty by paying any required, additional amount within the quarter of the payment’s due date.
What About a Home Office?
If you use part of your home for your business, you can deduct some home expenses. This deduction is available to homeowners and renters. Also, any type of home can take be used for a home office deduction.
If you use a studio, garage, or other structure on your property for the exclusive conduct of business, you can also take a home office deduction. For filing business taxes after 2013, the home office deduction is calculated by determining the percentage of your home used for business.
For example, you would need to determine the square footage of your home first. Next, determine the square footage of the business area. Divide the square footage of the business area by the total square footage of your home. You will have a decimal number. Move the decimal two places to the right, and you will have the percentage of home space used.
Direct business expenses, which are only those used by the business part of your home, are completely deductible. Indirect expenses, such as utilities, rent, insurance, repairs, and property taxes, are deductible at the above-explained percentage.
When you’re self-employed, you face constant challenges to your livelihood. Fortunately, you can minimize the stress of filing business taxes by understanding your responsibilities. Take the time to determine your net loss and gain, pay your quarterly taxes, and see if you qualify for a home office deduction.