In every society, the government needs a sustainable source of funds for public projects and investments. Through taxes, the economy will grow, and the government agencies can provide education, infrastructure, and health programs for the citizens, which is vital to have a functional and prosperous society.
If you are a freelancer or entrepreneur, you can pay self-employment tax. It includes your Social Security and Medicare. Since self-employed individuals cannot automatically deduct their taxes, you must monitor your responsibilities and make timely payments. In addition, because taxes are not automatically deducted from their incomes, self-employed individuals tend to have a higher tax payment than regular wage earners.
What is the Self-Employment Tax?
Self-employment tax is designed for individuals who hustle for themselves. It is a combination of social security and Medicare tax. Thus, the SE tax contributions provide them hospital insurance, disability, survivor, and retirement benefits through the social security system.
An individual must file their respective Self-Employment tax and pay them if they are included in the following categories:
- If their net income is equal to or more than $400, they are obliged to pay a tax.
- Suppose the individual works under a church-controlled organization exempted from social security and hospital insurance taxes. In that case, they must be subjected to tax if they have a wage of $108.28 or more from the church.
How to File IRS Self Employment Tax Form?
Before you can learn your tax responsibilities, you must know your tax rate first and how you can file them:
Research if your region or city requires separate taxes
Every region and city has a diverse set of rules, even in taxes. Local taxes can come in various forms, from property taxes to payroll taxes. There are also sales taxes and licensing fees. Make sure to familiarize yourself with the local taxes.
Understanding Tax Rate
In any business, figure out if your company has a net profit or net loss. You can compute it by deducting the expense of your revenue or sales. If your business costs are smaller than the gross income, you have a net profit. However, if your expenses are greater than your gross income, your business experiences a net loss.
Before filing and paying for your taxes, you must learn your tax rates. To know your tax rate, calculate your net profit or loss. If your income from being self-employed exceeds $400, you should file a Schedule C or Form 1040. Furthermore, you are still required to file and submit the document if you meet the other requirements under Form 1040.
Additionally, self-employed with expected more than $1000 earnings must pay their estimated tax payments quarterly. In this case, you will also need to utilize IRS Form 1040 to file these taxes.
There are two payment methods: Quarterly payments and annual return:
If you expect to undergo quarterly estimated tax payments, make use of Form 1040-ES. This form includes a worksheet the same as Form 1040. Ensure to keep your return because you will need the prior year’s return to complete Form 1040-ES.
Moreover, you can utilize blank vouchers that contain Form 1040-ES to mail your tax obligations. You might also opt to pay online through the Electronic Federal Tax Payment System. If this is your first year of being self-employed, you need to estimate your income for the year.
If you are filing an annual return, you need to provide the report of your income statement that states if the business gained profit or loss. Make sure to include all expenses related to the business operation. On the other hand, you must file your Schedule SE or Form 1040 for the Social Security and Medicare taxes. Utilize the calculated income or loss on the Schedule C or Schedule C-EZ to know how much Social Security and Medicare taxes you need to pay for the year.
Ways to Save on Taxes
In any business entity, both the company and the employee pay the taxes required by the government. The two major social programs involve Medicare and Social Security. However, when you are self-employed, the Internal Revenue Service views you as the employee and the business. That is why you self-employed pay more than employees.
If you have decided to transition from a full-time employee to an entrepreneur or freelancer, here are various methods to lessen your taxes:
Ensure that you include legal and marketing fees, which you use for starting your business. Any expenses related to starting a company must be listed so you can have them on your calculated income statement.
Most probably, you travel to process business requirements and legal transactions to start your business. Include transportation expenses to record your financial transactions correctly.
Supplies and Equipment
Include all the office supplies and equipment you are using to do your work properly. You can decrease your taxes by listing the amount of these necessary items.
Rent or Property Cost Deduction
Although you might be doing your work at home, you need to maintain a designated space to do your job. You can measure your home office area to allocate money for the rent, utilities, and property payments.
Health Insurance Premiums
If you have your own and your family health insurance, you can be eligible to deduct this healthcare cost from your taxes.
Taxes are not only imposed for the public interest but as well as your welfare. The objective of self-employment tax is to provide freelancers, sole proprietors, and independent contractors, Social security and Medicare. However, self-employed individuals who earn less than the IRS’s required income do not need to pay the tax.
Some self-employed people do not have background knowledge regarding taxes and end up paying more than what is required. If you are new in this industry, do some research and study how you can save your money. The tips and advice above can save you from paying excessive taxes. Make sure to record every financial transaction to provide an accurate income statement. Furthermore, make timely tax payments.