A Quick Tax Overview for the Self-Employed

Being self-employed can be a great way to make a living. You get to be your own boss and run your business on your own terms. However, if you’re new to being self-employed and are accustomed to being employed by someone else’s company, you’ll find that there are some differences when it comes to filing and paying your taxes.

Determining if you’re self-employed is pretty simple. You’re considered self-employed if you’re a sole proprietor, an independent contractor, a member of a partnership or operate a part-time business on your own. If you’re the owner of a part-time business, you should make sure the IRS will consider your operation a business and not a hobby. If they deem it a hobby, you will not be allowed to deduct operating expenses from your taxes.

While determining if you’re self-employed is simple, understanding your tax requirements is more complicated. You usually have to file a tax return each year and pay estimated taxes quarterly, like any other business. You also have to pay self-employment tax, which is the equivalent of the Social Security and Medicare taxes individuals are used to having deducted from their pay. You report these taxes on Schedule SE of Form 1040.

And of course, you have to pay income tax if your business is profitable. If you incur a loss, meaning your expenses exceed revenue, you may be able to deduct it from your gross income. You report your net profit and losses on Form 1040.

Quarterly estimated tax payments

When you’re employed by someone else’s company, they withhold taxes on your behalf. But this isn’t the case when you’re self-employed so you may have to make estimated quarterly tax payments like other businesses do.

You can estimate your quarterly tax payments using Form 1040-ES, Estimated Tax for Individuals. Using a worksheet and your prior year’s tax return, you can roughly calculate what you’ll owe each quarter.

If you’re new to self-employment and completing this form for the first time, you will need to estimate the income you expect to make in the current year. Do your best to get the estimates right but don’t stress about the figures too much. You’re able to make adjustments and pay the difference or receive credit in the next quarter.

Each quarter, you can make your tax payments online or by filling out vouchers included with Form 1040-ES.

What deductions should I consider?

Like any other business, self-employed people can deduct operating expenses from their tax return. Deductions vary depending on what a business does and how it operates but here is a list of common deductions self-employed people can take advantage of:

  • DepreciationProperty and equipment you own and use to generate income for the business depreciates over time, which can be claimed on your taxes.

  • Vehicle deduction – You can deduct the cost of you using your car for business purposes.

  • Home office deduction – If you run your business from a home office, you can claim home expenses on your business taxes.

  • Health insurance premiumsYou can deduct the cost of health insurance you purchase for yourself and your family.

  • Educational expenses – You can deduct the cost of classes you took to learn new skills to better run your business

The deductions listed above can benefit self-employed business owners but each has its own set of requirements that must be met and procedures that must be followed. A tax professional can make sure you qualify for these deductions and others and ensure all your forms are completed and filed on time.

BookKeeping Express (BKE) can help you track your expenses and prepare for your tax filing. Visit our features page to learn more.