Tax Hacks 2016: What You Need to Know if You’re Self Employed


What's Hot


2 Types of Black Marks Might Vanish From Your Credit File SoonBorrow

6 Ways the Obamacare Overhaul Might Impact Your WalletInsurance

7 Dumb and Costly Moves Homebuyers MakeBorrow

This Free Software Brings Old Laptops Back to LifeMore

Obamacare Replacement Plan Gets ‘F’ Rating from Consumer ReportsFamily

Beware These 12 Common Money MistakesCredit & Debt

21 Restaurants Offering Free Food Right NowSaving Money

17 Ways to Have More Fun for Less MoneySave

House Hunters: Beware of These 6 Mortgage MistakesBorrow

30 Household Uses for Baby OilSave

25 Ways to Spend Less on FoodMore

Nearly Half of Heart-Related Deaths Linked to These 10 Foods and IngredientsFamily

5 Surprising Benefits of Exercising Outdoors in WinterFamily

10 Ways to Save When You’re Making Minimum WageSave

Boost Your Credit Score Fast With These 7 MovesCredit & Debt

7 Painless Ways to Pay Off Your Mortgage Years EarlierBorrow

The Most Sinful City in the U.S. Is … (Hint: It’s Not Vegas)Family

The True Cost of Bad CreditCredit & Debt

10 Companies With the Best 401(k) PlansGrow

This Scam Now Tops ID Theft as the No. 2 Consumer ComplaintFamily

6 Stores With Awesome Reward ProgramsFamily

6 Ways to Save More at Lowe’s and The Home DepotSave

6 Healthful Treats for Your DogFamily

New Study Ranks the Best States in the U.S.Family

Thousands of Millionaires Moving to 1 Country — and Leaving AnotherGrow

Strapped for College Costs? How to Get the Most From FAFSABorrow

6 Overlooked Ways to Save at Chick-fil-AFamily

Ask Stacy: What’s the Fastest Way to Pay Off My Mortgage?Borrow

Where to Sell Your Stuff for Top DollarAround The House

8 Ways to Get a Good Price on a Shiny New AutoCars

Ask Stacy: How Do I Start Over?Credit & Debt

Secret Cell Plans: Savings Verizon, AT&T, T-Mobile and Sprint Don’t Want You to Know AboutFamily

30 Awesome Things to Do in RetirementCollege

14 Super Smart Ways to Save on TravelSave

The Rich Prefer Modest Cars — Should You Join Them?Cars

You’ll Soon Pay More to Shop at CostcoSave

10 Ways to Save When Your Teen Starts DrivingFamily

Being your own boss has some advantages, but you need to have a clear understanding of your tax obligations or risk a nasty surprise.

Being your own boss definitely has its advantages — flexibility, upward mobility, the chance to take your business in the direction you choose — but at tax time, being self-employed can be a challenge. Here’s a look at what’s expected of you when you go to work for yourself.

Self-employment tax

Like everyone else, if you’re self-employed, you’ll pay personal income taxes by filing Form 1040 on or before April 15. In addition, however, the self-employed also have to pay self-employment (SE) tax, which is a combination of Social Security and Medicare taxes.

You probably know that when you’re an employee, 6.2 percent of your gross pay is withheld from your paycheck for Social Security. What you may not know: Your employer also pays the government another 6.2 percent, bringing the total contribution for Social Security to 12.4 percent of your pay, up to $118,500.

Your employer is also responsible for paying another 2.9 percent of your pay into Medicare, with no limit.

When you’re self-employed, however, you’re covering all this yourself. You pay the entire 12.4 percent of Social Security, plus the 2.9 percent for Medicare. So while employees pay 6.2 percent of their earnings for Social Security, the self-employed pay more than 15 percent.

If your business earned $400 or more in net profit, you’ll owe SE tax. If your business netted less than $400, you may not need to even file a 1040. You may owe tax on your self-employment income even you aren’t self-employed full time or if your solo work is just a sideline. To know if you owe SE tax, subtract your business expenses (more on this below) from your business income using IRS Schedule C (Form 1040), Profit or Loss From Business.

If you owe self-employment tax, use a different 1040 form, Schedule SE (Form 1040), to report your income. Transfer your bottom line amount from Schedule C to the SE 1040.

The IRS explains the details at IRS Self-Employed Individuals Tax Center.

Schedule C-EZ

You might be able to use the simplified Schedule C-EZ if you meet the following criteria:

  • You earn a profit.
  • You have expenses of $5,000 or less.
  • You have no employees.
  • You have no inventory.
  • You are not using depreciation or deducting your home’s cost.

The IRS has help deciding between Schedule C and C-EZ.

Click here and learn to slash your taxes with our new tax course!

Quarterly tax payments

Self-employed workers estimate how much Medicare, Social Security and income tax they owe and pay it in quarterly installments. Use Form 1040-ES, Estimated Tax for Individuals (PDF) to calculate and pay quarterly taxes. It has a worksheet that helps estimate what you owe and vouchers to submit with your quarterly tax payments.

You’ll need last year’s tax return to complete it. If this is your first year of self-employment, you’ll estimate, making up any difference in subsequent quarters.

In addition, there are other requirements. Your specifics will depend on the type of corporate structure you’ve chosen.

Corporation types

Depending on how your business is incorporated you may have other tax reporting requirements. The IRS describes business structures and their tax filing requirements here.

Typically, self-employed workers, including contractors, operate as “sole proprietors.” Few one-person and small businesses become corporations as these have more complex tax and legal requirements.

Some small or one-person businesses use the S Corporation (S Corp) structure, though. The Small Business Administration, comparing incorporation options for businesses, says that “one of the best features of the S Corp is the tax savings for you and your business.” However, forming and operating an S Corp requires strict operating and reporting procedures that not every small business wants to undertake.

If you are curious about an S Corp, ask a tax adviser with expertise in this area to help you weigh the pros and cons.

Sole proprietors

You may be thinking, “Uh oh, I didn’t incorporate at all.” Breathe easy. The most common structure used by small-business people is a sole proprietorship. You don’t need to do anything special to declare yourself a sole proprietor, as long as you are the only owner.

Tax-wise, this is the easiest approach. For details on IRS filing requirements see the IRS forms for sole proprietors.

Limited Liability Companies (LLCs)

An LLC is a business structure established by your state that may give you some advantages, including some protection from personal liability. (The SBA has more on LLCs.) But having an LLC doesn’t affect how you file taxes — you just file as a sole proprietorship, an S Corporation or whatever business structure you’ve chosen to use.

State taxes

Paying state and local taxes is another obligation of self employment. Each state and local government has its rates and rules. The IRS offers links to each state’s tax authority. Check with your city government for local rules.

Business deductions

You can deduct “ordinary” and “necessary” business expenses by subtracting them from your income. Here’s the test, from IRS’ section on deducting business expenses:

An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

Independent workers’ deductions can include costs for travel, retirement savings, entertainment, insurance, license fees, taxes, and office equipment and software. These articles have the details on taking deductions:

More deductions

Some of your business expenses can be deducted only partially — your costs for a car used for both personal and business transportation, for example. If 30 percent of your car’s use is for business, you’ll deduct 30 percent of the vehicle’s costs.

As an alternative, you can deduct all of your business mileage, so keep a record with odometer readings for the start and end of each business trip and consult this chart for mileage rates the IRS allows.

Some business costs — investments that become business assets — are treated differently. They are capitalized, deducted over a number of years. Nolo explains deductions versus capital expenses.

Do you have experience paying taxes as a self-employed person? Share with us in comments below or on our Facebook page.

Stacy Johnson

It's not the usual blah, blah, blah

I know... every site you visit wants you to subscribe to their newsletter. But our news and advice is actually worth reading! For 25 years, I've been making people richer without making their eyes glaze over. You'll be glad you did. I guarantee it!

💰🗣📰

Read Next: Could These 12 Weird Tax Deductions Save You Money?

Check Out Our Hottest Deals!

We're always adding new deals and coupons that'll save you big bucks. See the deals to the right and hundreds more in our Deals section.

Click here to explore 2,018 more deals!