There is no escape when it comes to paying taxes, whether you are employed or self-employed, and all this needs to be done at the right time to avoid penalties.
Unlike those employed, self-employed individuals always suffer harsh penalties if they don’t pay their taxes, including deducting their paychecks plus liabilities.
Taxes for the self-employed individuals don’t get deducted automatically, making them a bit higher than those employed to cover the risks. Always set up money to cover your taxes every time you are required to pay. Here is how to manage your taxes if self-employed.
First, Know Your Taxes
If you are self-employed, you must set out your taxes in your final prices to avoid getting into losses while paying for the same. You should also consider the tax burdens when planning for their finances, including saving and investing in their ventures. You should also track your business expenses to deduct them from taxes at the end of the tax period. How do you understand by self-employment? According to the Internal Revenue Service (IRS), self-employed individuals comprise people who carry business in the form of sole-proprietorship or independent contractors, partnership members, and those who are employed but run a part-time business. There are over 15 million self-employed individuals in America. If you fall into this class, self-employment tax and income tax is necessary.
Basics for Filing These Taxes
Before making any self-employed taxes, you need to understand your rates and know your region’s terms and conditions. Some areas pay higher taxes than others. To know your status, you must calculate the net profit/loss and subtract business expenses from income. Such costs might include home office deduction 2020; if you work at home. Net profit, which is your income, is achieved when your expenses are less than the income. The vice versa becomes a net loss. Before making payments, you need to know your tax rate and the state and local taxes required to get paid. Earning exceeding $400 requires Form 1040, while those below may require the same form if they meet specific requirements.
How to Calculate Your Self-Employment Tax
Self-employment taxes differ in different years. It is always a percentage of your net earnings and encompasses Social Security tax and Medicare tax. In 2020, the first $137,700 of earnings will get subjected to Social Security tax, and 0.9% of Medicare may get subjected to your net earnings if they are above $200,000 for singles and $250,000 if filed jointly.
To determine your tax, you need to get gains of the year by removing all the total revenues expenses. At least 92.35% of your earnings get subjected to self-employment tax. Once you get the net profits, 15.3% of the amount will be your total self-employed tax.
How To File Your Taxes
There are two ways of filing your taxes, the quarterly way, and the annual way. If expected to pay your taxes quarterly, you will be required to fill out Form 1040-ES to fill the previous year’s returns, and then use the blank vouchers to mail your estimates. Another way is to pay online using the Electronic Federal Tax Payment System. If you have just joined your business, you need to use estimation. Annual returns require you to file an annual return of your net profit or loss from your self-employed business. Schedule C or Schedule C-EZ will help you determine your Medicare taxes and Social Security taxes you need to pay throughout the financial period.
Ways To Save On Taxes
If you are getting self-employed for a long time, you need to find ways of saving your taxes. It gets recommended to have tax software to help you with these calculations. Some of the saving ways include the below:
- Startup costs: if you are starting, you can deduct the expenses from your bill. Such include installing your business, marketing costs, and legal fees. While advertising helps you make money, it’s one way of reducing payable taxes.
- Vehicle expenses: other than the mileage deduction, you can deduct up to $25,000 in vehicle expenses.
- Home office deduction: if you have set up part of your house as a working area, you can calculate its size and deduct it from your taxes as rent, mortgage payments, property taxes, or utilities depending on the house.
- Supplies and equipment: any supplies and equipment you used for the job need to get deducted from the taxes as expenses.
- Social Security and Medicare taxes: you are required to full-pay these, just like the ordinary employed people. However, you can write-off half of it at the end of the year and save on taxes.
- Health insurance premiums: you are eligible to deduct such for you and the family in your taxes.
Deductions and Credits
You need to know the difference between tax deductions and tax credits if you want to save money on taxes. Tax credits reduce the amount of tax you owe while the deductions help lower the total amount of taxable income. The latter also decreases the tax bracket, lowering your amount of taxes.
Such deductions include standard tax deduction – which varies according to your marital status and itemized deductions – which vary according to an individual. Itemized deductions include Property taxes, state sales, local tax, certain medical and dental expenses, state income taxes, charitable contributions, Student loan interest, and Mortgage interest. One thing you should note is that you aren’t allowed to take both standard and itemized deductions. You need to choose one that is higher.
What are Tax Credits?
Tax credits also come in two types: Nonrefundable credits and refundable credits. Nonrefundable credits can reduce the tax liability to zero while refundable tax credits reduce liability to zero, but refunds any remaining credit balance. Types of tax credits include Premium tax credit, Earned income credit, Health coverage tax credit, American opportunity credit, Additional child tax credit, and Credit for federal tax on fuels.
Always get prepared for any tax season. To do so, you need to know your tax obligations and keep all expenses at hand for easy filing. Do not wait until the last minute to avoid inconveniences since penalties are always severe. If you find that monitoring is hard, get the software to track your income and expenditure. We hope this article has dramatically helped you when it comes to Managing Taxes for Self-Employed Individuals.
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