If you are self-employed then you qualify as an independent contractor. This means that you don’t belong to a company and that you’ll have to be taxed differently. If you were an employee before, you’d already know that you and your employer paid taxes. However, now that you’re your own employer, only you get to pay taxes. You’re also regarded as a sole proprietor, which in the tax field means that you’ll be registering your locality alongside your business trade name otherwise you won’t be seen as a self-employed person. With that being said, taxes for independent contractors aren’t common knowledge, which is why you might be seeking knowledge about the subject.
There are important details that you should know, like documentation and deduction of unnecessary expenses, if you’d like to know more, make sure you check out this list!
As a self-employed person, you should know by now that you need to do your own taxes, which is another way of saying that you’ll need to meticulously document every penny that you spend on business-related items. Now, that you’re not working in a company, your taxes won’t be deducted from your paycheck. This means that the IRS will need to audit your expenses and your income. Obviously, they’ll take a look at your documentation. However, writing down how much you’ve spent on your work this month is meaningless if you don’t have any evidence to back it up. For instance, if you’ve had business trips that you’ve completed with your car, then you need to check the number on your mileage tracker. This will count as solid evidence for the IRS. This applies to anything else, like if you have a space in your home that’s for business, then it should strictly be used as a workspace. Make sure that your documentation is supported by evidence.
If you’re new at this then you’re probably wondering how you’re going to be able to pay your taxes and in which form you’re going to do it. The first thing you should know is that you’re going to be filling out a Schedule C form. This is where you’ll be stating your business costs and income. You should also know that your profit and any kind of income that you earn will be added to your tax return. Now, all of this is under the federal income taxes, which means that you still have the state income taxes. If you live in a state that asks its citizens to provide state taxes, then you’re required to do so. You’ll pay a small portion of your profit to the state as part of its taxes, this will also be included in the Schedule C form.
Luckily, there are a lot of expenses that you spend on your business, they might seem insignificant for you, however, if you keep track of them they can add to a huge sum of money. For instance, you may deduct certain expenses or 1099 deductions, such as work supplies, cell phone bills, commissions, work trips, car mileage, business insurance, depreciation of assets, health insurance premiums, and home office costs. While you’re taking out these costs, you’ll realize that some of them are easier to provide evidence for than others. Meaning, you can provide receipts for work supplies and plane tickets for work trips and that would be all the evidence you’d need. However, other things like cell phone bills can be tricky to keep track of. The best thing to do in this scenario is to have a specific phone for business calls that way you can easily differentiate between personal and work calls.
Calculating your taxes as a sole proprietor might be a bit challenging if you’re finding it a bit confusing, consider getting Schedule SE so you can conduct the right calculation on it. All you need to do is to combine all of your earnings together and add them to the form so that you know how much you need to pay. With that being said, there are a few exceptions for payment. For instance, if you’ve had a rough year and you haven’t made a lot of profit, then you’ll need to state the amount of income that you’ve earned this year. Then multiply it by 92.35%, if the outcome is less than $400 then you don’t need to complete the form nor do you have to pay taxes.
If all of this is a bit much for you or you simply don’t have the time nor the energy to figure out your taxes, complete the forms and calculate your income, then you might need to pay someone to do your taxes. It’s vital that you know that you’re not the only person who feels this way, in fact, there are a lot of people who have similar feelings to yours, which is why there are many tax software programs today. Several companies have designed clever software that can manage the clients’ taxes, as well as, complete the form and calculations for them. Of course, there are a lot of online services that provide these kinds of services, so you have to do your own research to see which one fits you best.
All in all, you need to remember that doing your own taxes is difficult and annoying, so it’s okay to feel overwhelmed by the process that you need to go through. Being self-employed isn’t easy and having to fill your own forms doesn’t make it any easier. This is why you should be aware of certain information so that things can get a tad easier for you. First of all, you need to remember to document your costs and provide enough evidence for them. Second, you need to be aware of the types of forms that you’ll need to fill. Third, know that you can deduct a lot of expenses, so long as they’re all business-oriented. Fourth, remember that self-employment taxes have their own calculation, so do that on Schedule SE. Finally, if it gets too overwhelming, you can always seek out a tax service until you get a hold on things.