Being self-employed allows a certain amount of independence – you are your own boss, you choose your own hours, and many more benefits can be found in self-employment. But with this independence comes an increased responsibility. As your own boss, you have to take care of all of your finances instead of just getting a check ready to go into your account on payday. That also means doing your own taxes at the beginning of each new year – that’s right, it’s tax time! But how do you calculate your taxes as an individual or small business?
Not everyone has access to that information, but it’s becoming more commonplace as time goes on. That’s why this article will run you through the tools you need to calculate your taxes as a person that is self-employed.
Before We Start
It’s important to note that there are distinctions in tax forms for people that are self-employed depending on what work they are doing. People that run a small business would fill out their tax forms differently than a person who owns a farm, and both of those people would file differently than an independent contractor. Keep this in mind, and what kind of self-employment you fall under, before filing.
The Basics of Taxes for Individuals
In order to do your taxes with any form of employment, it’s important to make sure you understand certain key terms that help you determine your tax liability. First and foremost, there is your earned income and the income tax that is applied to it. To pay self-employment tax as an individual, you must consider your income tax, federal tax, state tax, and social security and medicare taxes. Because you are an individual in this case rather than the owner of a business or farm, you have to concern yourself with only your own income and related taxes. A tax calculator can be a helpful tool in figuring out things like the social security portion and the medicare portion of your taxes. If you aren’t 100% sure of your earnings and how much you need to pay in taxes, it’s okay to estimate your self-employment income as a slightly higher number to ensure that, in the worst case scenario, you overpay your taxes and get money back instead of underpaying and owing the government unknowingly.
The Difference Between Individuals and Small Businesses
Filing taxes as an individual is arguably easier than doing so as a small business owner, but that doesn’t mean it’s impossible! There are just a few more terms to take into consideration, such as the net earnings of your business. This is the income your business makes after you subtract business expenses, which is the income you base things on your federal income taxes. Similar measures are applied to those that own and run a farm or church. Small business owners will also have to consider the taxes of the individuals under them – in this case, you must remember that you have an employer portion of taxes to pay for your employees like social security and medicare as a business owner. A tax calculator can also help you find out these numbers, so be sure to use one if you aren’t sure or want to double-check your taxes!
Tax Filing Similarities
Even though there is a big difference between owning a small business or farm and working as a self-employed individual, certain things about filing taxes remain the same for all people. Anyone who is self-employed must file a Schedule SE (Form 1040, to be exact). This form is like the self-employment version of W-2 paperwork you would receive from your employer if you worked under a company. This form has an employment tax rate that applies to all people regardless of circumstances or employment income, and is very important to fill out during tax season as, once again, it acts as the W-2 that businesses use to calculate tax on your income if you work for a business. When in doubt, follow the prompts on the Schedule SE or ask a professional for clarification on points that confuse you in the form.
Now that you know a little more about the difference between types of self-employment and what forms to be looking out for and fill for your taxes, it’s time to bust out that tax calculator and get to work! Seek assistance as necessary, and good luck!