Self-employment is becoming very attractive to many in this day and age. However, while the work environment itself may change, your tax liability does not. Self-employed individuals still have to pay income taxes. With that in mind, those who have just begun to work as their own boss may not know where to begin. If you’re anxiously awaiting tax season and you’re not sure how to report your income correctly, let’s take a look at the guide below to walk through the process.
How are you supposed to report your income to the IRS?
Filing your taxes when you’re self-employed isn’t much different from when you’re filing as an employed individual. In fact, there are tons of tax software solutions out there designed specifically for self-employed individuals. This makes it easy for you to simply add your income and let your software do the work for you. You can also enlist the help of a tax specialist or outsource your finances to an accountant to receive comprehensive financial support throughout the duration of your business. With that in mind, there are specific rules you need to be aware of. For example, all self-employed individuals must make quarterly payments or risk paying penalties in the future. Doing your research is critical to avoiding penalties and audits.
It can also be beneficial to stay on top of your finances throughout the year. Investing in materials like tax envelopes, folders, and specific tax forms like the W-2 form can help you stay organized and create a system of tax folders and paperwork that you can access when you need to assess your financial health. More importantly, there are a wide variety of designs for custom tax return envelopes (double window, moisture seal or peel and seal, etc.). This makes it easy to organize your tax returns or tax payments annually so that you don’t get confused as you conduct business. It also makes it easier to send out employee tax documents when the time comes.
What happens if I pay someone else to support my business?
For the most part, freelancers and sole proprietors only have to worry about the money that they make when they’re reporting taxes. However, if you enlist the help of someone else to work for you, you’re going to need to report those payments as well. Let’s imagine that you needed support with social media marketing. As a result, you decided to reach out to social media content creators who could produce content that would influence your audience and grow your following. This gave you the ability to scale your business and grow your income.
If these individuals were freelancers themselves, you need to report these payments to the IRS and provide these individuals with documentation of their earnings. In this situation, you would be reporting payments with form 1099-NEC. Every situation is different, so it’s best to reach out to a tax specialist if you need help reporting employee or non-employee income.
Why do I need to pay self-employment taxes?
If you operate your own business, you’re considered to be both an employer and an employee. This makes you responsible for covering the taxes that an employer would take out of your paycheck to contribute to Medicare and Social Security. As a result, you’re responsible for paying that half, with the maximum self-employment tax being 15.3 percent of your income. As long as you pay this amount and report your income correctly, you should be golden!
Self-employment taxes can be confusing for first-time freelancers or sole proprietors. Dive deeper into income taxes in the guide above, and reach out for support when you need it!