14th July 2022
Filing income taxes when you are self-employed can present a different set of considerations and challenges than working for an employer. Planning ahead and staying organized will help you stay on top of your tax responsibilities while you build your business. MSI's Ohio accounting member Corrigan Krause provides further insight.
The IRS has three different categories for self-employed individuals:
If you fall under any of the three categories above, you are considered self-employed.
When you are self-employed or freelancing, there is no automatic withholding when you earn money, so you must take all tax responsibilities into account when planning your finances for the year. This includes accounting for your tax responsibilities when you’re setting the pricing for your goods and/or services.
Since there is not automatic withholding happening to cover Social Security and Medicare taxes and you are not splitting the responsibility with an employer, you are responsible for the full 15.3% for these programs. This amount is referred to as self-employment tax. Currently, 12.4% goes toward Social Security and 2.9% goes to Medicare. Keep in mind that only the first $147,000 earned in a year (wages, tips, net earnings) are subject to the 12.4% Social Security tax, however all wages are subject to the Medicare tax.
You must pay the self-employment tax if your net earnings are $400 or more (excluding church employee income) or you have church employee income of $108.28 or more.
It’s important to estimate what your self-employment tax responsibilities will be for the year. The IRS has an online estimator tool you can use. You can also use a simple equation:
Now that you have your net profit or loss, you can apply the self-employment tax rate discussed above to get your self-employment tax responsibility. This is not, however, your only tax responsibility. There may be additional state or local taxes that apply to you.
If your earnings were over $400, you need to file a Schedule C (Form 1040). If your estimated self-employment tax responsibility exceeds $1,000, the IRS expects you to make quarterly payments. Use IRS Form 1040-ES to file these payments, as it includes vouchers. You can also pay online using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, here’s more information on paying your estimated tax responsibility.
If your earnings were under $400 or you operated under a net loss, you still need to file a Schedule C (Form 1040), if you meet one of these standards:
There are certain deductions or write-offs available to self-employed individuals that can alleviate some of the tax responsibility. Here are some of the most common deductions:
The professionals at Corrigan Krause can help you navigate the different tax opportunities and responsibilities you may have.
Corrigan Krause CPAs and Consultants is a team of dedicated, passionate, experienced professionals who provide comprehensive consulting, tax and accounting services. With a growing team of more than 80 members, our firm has proudly served individuals and privately-held businesses since 1989. We are headquartered in Westlake, Ohio with two additional offices in Medina and Mayfield Heights, Ohio.
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