With the rise of freelance employment, more people are working part-time or full-time as independent goods or service providers. Whether you provide digital services, sell arts and crafts, or work in any way, shape, or form as a solo entrepreneur, you will need to pay taxes on what you earn. This post is designed to help you understand your tax obligations for self-employed entrepreneurs.
General Tax Obligations For Self-Employed Entrepreneurs
If you are a sole proprietor, independent contractor, or sell goods or services, you are considered to be self-employed, even if only part-time. This means you will need to file an annual tax return and pay self-employment tax, which contributes to your Social Security and Medicare. While your tax return is annual, you will also need to pay estimated quarterly taxes every 90 days.
To determine what you are subject to pay, you must calculate your quarterly and/or net profit or net loss. This is achieved by subtracting your qualified expenses from your total income. If your expenses are less than your income, you have a net profit. If your expenses are more than your income, you have a net loss. Your profit or loss is entered on page 1 of your Form 1040. Usually, if you have a loss, you can deduct your loss from your gross income. To determine which losses qualify, see Pub. 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ).
If your net self-employment earnings for the year are $400 or more, you must file an income tax return. If your net earnings are less than $400, but you meet the filing requirements in the Form 1040 instructions, then you still must file a return.
Estimated Quarterly Taxes
Your estimated quarterly taxes are your contribution to Social Security, Medicare, and income tax typically withheld by your employer. Not only are you required to pay these taxes every 90 days, but it will ease your financial burden by paying a portion 4 times a year, rather than one lump sum at the end of the year. Form 1040-ES, Estimated Tax for Individuals contains a worksheet you use to calculate your estimated quarterly taxes for the first 3 quarters. You use 1040 for your end-of year taxes. You will need your previous year’s tax return to fill out your 1040-ES form properly, unless it is your first year in business.
Submit the blank 1040-ES vouchers by mail using the Electronic Federal Tax Payment System (EFTPS). This will require you to estimate your income for the remainder of the year. If your estimate is too high or too low, you can even it out during the next quarter.
Filing Your Annual Tax Return
At the end of the year, you will need to file an annual tax return. If your expenses are $5,000 or less, you will most likely file a Schedule C-EZ. If your expenses are greater than $5,000, you can file a Schedule C. Schedule C Instructions will assist in filling out this form.
To file your annual tax return, you will need to use Schedule C (PDF) or Schedule C-EZ (PDF) to report your income or loss. Schedule C Instructions (PDF) may be helpful in filling out this form.
At the end of the year, you will need to calculate whether your estimated quarterly taxes were correct. During this 4th quarter, you will pay for the 4th quarter—plus the estimated 1st through 3rd quarter difference. Your end of year SE will also contain your annual income or loss.
If you made or received a payment as a small business or self-employed individual, you may also need to file an information return to the IRS.
How To Structure Your Small Business
Now that you understand the tax obligations for self-employed entrepreneurs, you might wonder how to structure your start-up. How you structure your business determines which income you have to file on your tax return. The most common business structures include:
- Limited Liability Company (LLC)
- Sole Proprietorship
- Partnership
- Corporation
- S Corporation
To understand the different business structures, please visit Business Structures.
Home Office Business Deductions
While your overhead will be lower when operating a home business, you may deduct some expenses related to operating your business out of your home. This goes beyond office and business supplies. Even renters may be eligible for home office deductions.
Qualified Joint Venture For Married Business Owner
Married business owners have a few tax requirements that vary from small business owners who hire non-family employees. Check out this link for a better understanding of your qualified joint business venture.
DIY Small Business Tax Videos
The IRS provides some excellent DIY small business tax videos and guides. While these resources are excellent, it is wise to consider working with a trained professional to ensure you are fulfilling all your tax obligations.
Your tax obligations for self-employed entrepreneurs and small business owners change every calendar year. This means you must check back each year to see what has changed. Some changes will be more complex, while some offer more benefits for small business owners. At least consider having a tax professional check your quarterly and annual taxes prior to filing.