Self-Employment Tax Laws

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 What Is Income Tax Law?

The Internal Revenue Code (IRC) outlines the main standards for tax laws, including local, state, and federal regulations. The Internal Revenue Service (IRS) enforces the IRC.

The IRS is the federal government agency that is responsible for collecting taxes. According to the IRC, income tax is a category of tax that the government imposes on personal income.

For example, when an individual receives their paycheck, a certain percentage is deducted from the total amount. This deduction typically accounts for different levels of income taxes as well as federal or state programs, such as Social Security benefits.

If an individual’s employer deducts income taxes from their paycheck, then this will be reflected when they file their state and federal taxes for the year. This tax reflection is why some individuals receive a tax refund or excess payment after they file their taxes.

It means they paid more in income tax than was necessary for that year. Not every individual, however, is subject to income tax laws.

For example, the federal government does not collect income taxes from individuals who are unemployed. Some states may also not require residents to pay income tax.

Because of these variances, it is important for an individual to learn about the federal income tax laws and rules for paying income taxes in their state. All of this can be done by consulting a local tax law attorney.

A tax law attorney can also advise an individual of their rights and protections under state and federal income tax laws.

What Happens if I Do Not Pay All of My Taxes?

If an individual does not pay all of their taxes, they may be subject to fees. If they have a legitimate reason for not paying their taxes, they may be able to negotiate an extension or a payment plan to pay the taxes they still owe in monthly installments.

On the other hand, if a taxpayer does not have a valid reason why they did not pay all of their taxes or deliberately avoid paying their taxes, they can be charged with a felony. Generally, it is illegal to refuse to pay taxes.

An individual who engages in an intentional scheme to avoid paying taxes to the IRS commits tax evasion. Tax evasion is a felony offense that may lead to serious criminal fines and a prison sentence of up to five years or more.

If a taxpayer only pays a portion of the taxes that they owe, they may be subject to an audit by the IRS. An audit is a review of the individual’s financial information and their various monetary accounts.

The IRS uses audits to confirm that taxpayers are accurately reporting their taxes and complying with federal laws. The results of audits may lead to criminal consequences, amended tax returns, or no change at all.

What if I Am Self-Employed?

An individual who is self-employed is still required to pay the following:

  • Federal income tax;
  • Social Security;
  • Medicare taxes.

Individuals who are self-employed and engage in employment tax evasion are subject to criminal and civil penalties. A self-employed individual must make sure they report all of their business expenses and all of the income they receive from their business that is taxable.

Proper and accurate record-keeping will help self-employed individuals with avoiding tax evasion and tax fraud.

How Is Income Tax Reported if I Am Self-Employed?

As noted above, employers are required to deduct taxes from their employee’s paychecks before they receive their take-home pay. If an individual is self-employed, they will be required to pay their income tax, Social Security and Medicare taxes, or self-employment taxes themselves.

A self-employed individual will be taxed based on the income that they earned that year. Self-employed individuals must do the following:

  • File an annual income tax return if they make at least $400;
  • Make quarterly payments based on estimated income if they expect to owe the IRS at least $1000.

An employment tax lawyer can help a self-employed individual file their income tax return if they have any concerns about completing it correctly. There are specific self-employment tax forms that self-employed individuals must use when filing their taxes.

Who Is Considered Self-Employed?

Employees who work for employers receive W-2 tax forms each tax year. A self-employed individual may be either of the following:

  • A business owner who should complete schedule K-1;
  • An independent contractor who will receive a 1099-MISC income tax form.

What Kinds of Expenses Can I Deduct From My Income Tax Report?

An individual can report certain business expenses on Schedule C or Schedule C-EZ if they have business expenses of $2,500 or less. Examples of these expenses may include the following:

  • Car-related expenses;
  • Health insurance expenses;
  • Interest paid on business debts;
  • Rent on the business property;
  • Real estate and personal property taxes;
  • Certain travel, meals, or entertainment expenses;
  • Utilities;
  • Wages that are paid to family members who work for them;
  • Professional expenses.

An individual may also deduct half of the Social Security and Medicare taxes.

How Do I Calculate My Self-Employment Income Tax?

Self-employment income is the net profit from an individual’s business or profession, whether they work full-time or part-time. Self-employment taxes are calculated on Schedule SE, which an individual has to file if they earn more than $400 per year in self-employment income.

Currently, the self-employment tax rate is 15.3%. This percentage applies to earnings under $87,000. Self-Employment taxes apply to .9235 percent of an individual’s net income.

Additionally, after an individual has figured out their self-employment taxes, they can then deduct 50 percent.

What Are the Quarterly Payment Periods and Due Dates; Why Do They Matter?

If an individual is an independent contractor and expects to owe more than $1,000 in taxes at the end of the year, they will need to pay an estimated tax. In order to determine their estimated tax, they will need to estimate the amount of income they expect to earn in a year and include any deductions or credits they may have.

An individual’s estimated taxes must be accurate. Otherwise, an individual runs the risk of overpaying or underpaying their taxes.

If an individual paid the majority of their taxes and the miscalculation was a mistake and not fraud, it is not likely they will face a fine.

Payment periods for estimated taxes are the following dates:

  • January 1 – March 31;
  • April 1 – May 31;
  • June 1 – August 31; and
  • September 1 – December 31.

They estimated tax payments for each quarter must be paid by the following dates:

  • April 18;
  • June 15;
  • September 15; and
  • January 16.

Are Health Insurance Premiums for Self-Employed Individuals Deductible?

In general, health insurance programs and dental and long-term care policies are 100% deductible for individuals who are self-employed. An individual may also take these deductions for their covered spouses and dependents.

It is important to note that this is not a business deduction. For an individual to qualify for the tax deduction, they must:

  • Have no other health coverage;
  • Have actual business income.

Should I Contact a Tax Attorney?

If you have any issues, questions, or concerns about self-employment tax issues or if you plan to file your self-employment income tax form yourself and feel competent to do so, it may be helpful to contact a tax lawyer. Your lawyer can advise you about the complicated tax system in addition to filling out the forms correctly and making timely payments.

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