As a self-employed person, you will usually be filling out at least two forms that most Americans do not complete: Schedule C for sole proprietors, and Schedule SE to pay self employment tax. The next thing we suggest is the tool that every decent tax professional in the country follows: Check every entry at least twice. About Bob Jennings, CPA: Bob Jennings CPA, EA, CFP, CITP is a nationally renowned speaker, presenting continuing education classes to over 150,000 tax professionals over the last 20 years all over the world. About genConnectgenConnect is your place to create genuine connections to world-class experts on what matters to you. Paying taxes as a self-employed business owner has several advantages, including the ability to more thoroughly wed your personal and business lives.
A thorough explanation of farming, partnership or corporate taxes is simply beyond the ken of a humble article such as this. Schedule C is where you report your profit or loss from a business or profession as a sole proprietor.
Schedule SE (self-employment) must be filed by all taxpayers who earn more than $400 through self-employment and have an earned income of less than $37,800. 1040-ES (estimated tax): This is the self-employed person's version of withholding, and it must be filed quarterly — along with the appropriate funds.
940 and 941: If you have any employees, you must pay FUTA (unemployment compensation) and FICA (social security) taxes and report quarterly.
W-2 forms reporting income of all employees must be given to employees by January 31 and filed with the IRS by February 28. Excise taxes: If you engage in certain activities — such as manufacturing or selling bows and arrows, or dispensing gasoline — you may have to collect excise taxes from customers and pay them to the IRS. From a tax standpoint, the main advantage of self-employment is that it allows you to more thoroughly wed your personal and business lives.
After more than 30 years of tax practice, I still find that many tax return errors are caused by simply entering information incorrectly. Learn, share and engage with experts and each other through articles, videos, Q&A, events and online chats to enrich your career, health, relationships and lifestyle. The penalty for underpayment of estimated tax in 1984 is calculated on Form 2210 (which also contains exceptions to these and other rules).
However, if the liability for FUTA amounts to less than $100 per year, you can file 940 just once per year by January 31.


See Publication 334 for details, including a list of activities that require collection of excise taxes. More of your everyday activities become deductible because so much of your time is spent in business-related activity.
Start by recognizing that as a self-employed person you are responsible for all of your own income tax by paying quarterly tax payments. If you want to try to determine depreciation, fill out Form 4562, but a word of warning here because bonus depreciation, Section 179, MACRS lives and AMT usually will send you screaming into the streets searching for tax help. Ask your friends for a referral, check the web sites of firms in your area and ask some of the local businesses you deal with for referrals.
When you start your own business, you alone will be responsible for the paperwork that a big business pays a whole staff of accountants and bookkeepers to do. Schedule C allows you to deduct many miscellaneous expenses that a W-2 employee would be able to take only if he or she itemized deductions. For example, if you hold equipment or tools for performing your job, you may depreciate them on Schedule C (along with Form 4562).
Form 1040-ES must also be filed by any taxpayer who will owe the government more than $400 on Form 1040 ("Amount You Owe," line 68). The IRS has not approved such an approach.) For example, you may decide to conduct business from your home.
If you divide the use of equipment between self-employment and a W-2 job, first year expensing and depreciation must be appropriately allocated.
You'll need an office to work in, so you can set aside a portion of your household and deduct the expenses for that area as a business activity.
If it is going to take you more than a few hours to do your return, go to a professional – it is cheaper in the long run, particularly when you add in the cost of your own lost time, software, state software, e-filing and worry. This tax is a 13.3 percent additional tax for Social Security and Medicare over and above federal and state income tax. Exceptions to this include dividends and interest, capital gains and rent from real estate for which you aren't a dealer and don't provide services to occupants (hotels, apartment buildings, etc., do produce self-employment income).
If you don't itemize, you lose the deduction for the portion of the use that is for your W-2 employment. You'll probably also be using your personal vehicle for business, so a portion of that expense will be deductible.


Second, if your return involves more complex tax issues like home office deductions, depreciation, early pension plan withdrawals or a lot of travel, go to a professional because the laws are too complex to figure out in a reasonable manner. If your self-employment income exceeds $400 per year, you're responsible for reporting it to the IRS as a self-employed person. The tools, materials and supplies of a trade or profession are examples of more deductions taken by the self-employed. You may be able to take advantage of renewable energy tax credits for energy equipment you install at your business.
If the IRS decides you're simply practicing a hobby, you'll not be allowed to deduct expenses that exceed income, you won't be allowed to deduct portions of bad debts owed to you, and you won't be able to apply for refund of prior taxes.
Furthermore, hydropower retrofitted to existing dams is included in the business energy tax credit code. If, however, at that point you fail to have had two profitable years, the IRS will disallow losses retroactively — you'll have to pay back any loss deductions you claimed in previous years, unless you can prove profit motive in a different way. Owners of businesses may also offer themselves, as employees, health and life insurance policies as fringe benefits — just as employees of big businesses are provided with such perks. A major restriction, however, is that there are complicated rules concerning discrimination against employees by owners — you generally can't give yourself substantially better benefits than you provide for all full-time employees. One potentially major advantage for self-employed people is that they may set up highly beneficial retirement plans (again, as long as all full-time employees are included). The contributions to and earnings of such plans are tax-deferred; that is, the money isn't taxable as income until the benefits are distributed at retirement.
As a self-employed person, you may defer taxes on substantially more income than is allowed by employee Individual Retirement Accounts (IRA's) — in some cases, more than $100,000 per year. Additionally, your investment opportunities are much greater with a self-employment retirement account. Since your net operating loss will reduce your previous year's income, you may be able to get additional money back by filing Form 1040X with an attached Schedule G (income averaging). A Final NoteWe're not encouraging you to set up a small self-employment business merely to dodge taxes, but it will behoove you to pay heed to the tax effects of being your own boss.



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