Being self-employed can be fulfilling and inspiring because you are working hard to build your dreams. As author Oliver Markus Malloy said humorously, “Being self-employed means you work 12 hours a day for yourself so you don’t have to work 8 hours a day for someone else.” However, the fruits of your labors don’t come tax-free. Self-employed taxes need to be considered and treated carefully so they don’t interfere with the pursuit of your dreams.
What Does it Mean to be Self-Employed?
Someone who is self-employed is an individual who earns a living by working for himself or is the owner of an unincorporated business. Not someone who is an employee of someone else and not an owner or shareholder of a corporation. That includes the following, even if you are paid in cash and don’t receive a 1099-MISC form:
- A sole proprietor.
- An independent contractor. An independent person who is running his/her own business.
- A freelancer. A person who does work for different individuals or businesses.
- “Second jobs” (in addition to traditional employment) matching the above definition.
If you are engaged in an activity that occasionally produces income, but the main purpose is not for profit, then that “hobby income” should be reported as Other Income on the tax return.
What Taxes Do I Have to File While I am Self-Employed?
If you are self-employed, work on your own and are not an employee of someone else, you will pay taxes differently than employees do, and you must file a tax return if the total self-employment income is at least $400. There are two taxes to pay: self-employed taxes and income taxes.
Self-employed taxes are calculated on gross revenue minus tax deductions, equaling your taxable profit. The tax rate is 15.3 percent, which includes Social Security and Medicare taxes.
Income taxes are calculated the same way as with employees: your gross profits minus personal deductions and other tax credits. Notably, the tax law allows you to deduct 50 percent of your self-employed tax from your taxable income. The taxable income amount determines your tax bracket.
Tax Deductions Available to the Self-Employed
These deductions are available to the self-employed, based on keeping accurate records:
- Office supplies
- Reference materials
- Travel expenses (using a written log to track business miles)
Considerations for Filing Taxes
It is the individual’s sole responsibility to file self-employed taxes:
- Determine what you need to pay by working closely with a qualified tax accountant.
- Make paying taxes a priority and set aside funds to meet your tax obligations for the year.
- Meet the required payment schedule.
Get Expert Tax and Accounting Assistance
Contact Doerhoff & Associates CPA, based in Jefferson City, MO for professional tax and accounting assistance that will help you achieve the business success you are striving for. Comprehensive services with less headaches for you.
