Employers are required to deduct your taxes from your paycheck before you ever receive your take-home pay in the form of your paycheck. However, if you are self-employed, you will be required to pay your income tax, and Social Security and Medicare taxes (these last two are also known as self-employment tax) yourself. You will be taxed based on the income you’ve earned. As someone who is self-employed, you must:
- File an annual income tax return (if you make at least $400)
- Make quarterly payments based on estimated income (if you expect to owe the IRS at least $1000)
Who is Considered Self-Employed?
Employees work for an employer and receive a W-2 tax form each year. Self-employed individuals may be either:
- Business owners (who should complete schedule K-1), or
- Independent contractors (who will receive a 1099-MISC income tax form)
What Kinds of Expenses Can I Deduct from My Income Tax Report?
You report certain business expenses on Schedule C (or Schedule C-EZ if you have business expenses of $2,500 or less).
These "expenses" include car expenses, health insurance expenses, interest paid on business debts, rent on business property, real estate and personal property taxes, certain travel/meals/entertainment expenses, utilities, wages paid to family members who work for you, and professional expenses.
You can also deduct half of the Social Security and Medicare taxes.
How Do I Calculate My Self-Employment Income Tax?
Self employment income is your net profit from your business or profession, whether you participate full- or part-time. Self employment taxes are calculated on Schedule SE, which you are required to file if you earn more than $400 in self-employment income.
As of 2004, the self-employment tax rate is 15.3 percent. Self-employment taxes of 15.3 percent apply to earnings under $87,000. Self-Employment taxes apply to .9235 percent of your net income. Also, after you have figured self-employment taxes, you can then deduct 50 percent.
What are the Quarterly Payment Periods and Due Dates; Why Do They Matter?
If you are an independent contractor and expect to owe more than $1,000 in taxes at the end of the year, then you will need to pay an estimated tax. To determine your estimated tax, you need to estimate the amount of income you expect to earn in a year and include any deductions or credits you might have.
It’s important that your estimated taxes are accurate, otherwise you run the risk of overpaying or (worse) underpaying your taxes. If you paid the majority of your taxes and your miscalculation was a mistake, not fraud, then it is likely that you will not face a fine.
Payment periods for estimated taxes are:
- January 1 – March 31
- April 1 – May 31
- June 1 – August 31
- September 1 – December 31
Each estimated tax payment for each quarter must be paid by:
- April 18
- June 15
- September 15
- January 16
Are Health Insurance Premiums for Self-Employed Individuals Deductible?
Health insurance premiums, as well as dental and long-term care policies for self-employed individuals are generally 100% deductible. You may also take these deduction for your covered spouse and dependents. It is important to note that this is not a business deduction. To qualify for the tax deduction, you must:
- Have no other health coverage; and
- Have actual business income.
Should I Contact an Attorney?
If you have any questions regarding self-employment tax issues, or even if you plan to file your self-employment income tax form yourself and feel competent to do so, it may be wise to contact a tax attorney.
An attorney can advise you on the complicated tax system as well as assist you in filling out the correct forms and schedule.