Basics of Self-Employed Taxes

Self-employment is great because you get to be your own boss, but it can definitely be tricky when filing your taxes. In this article, we discuss the basics of self-employed taxes so you can easily handle tax season!

To learn more about self-employed taxes, see the TaxSlayer Self Employed Guide.

Form 1040 and self-employment

Whether you’re a full-time freelancer or do some projects on the side for extra cash, you need to file IRS form 1040 if you made over $400. Since this threshold is so low, it is important that anyone working outside of a W-2 employer understands that IRS Form 1040 is a requirement.

What is the self-employment tax?

The self-employment tax is essentially the equivalent of FICA (Federal Insurance Contributions Act). Here’s how it works:

All W-2 employees making less than $128,400 pay 7.65% of their income to FICA for social security and Medicare, and this amount is automatically taken out of their paychecks. The total tax is actually 15.3% but the employers pay the other half. Since self-employed workers don’t have an employer, they are responsible for the full 15.3%, which is why the threshold for requiring form 1040 is so low.

If you have business income, that will be claimed on either the Schedule C or the Schedule C-EZ. Your self-employment income will be claimed on Schedule SE. If you’re worried that this sounds too complicated, you can trust in the tax experts at TaxSlayer to ensure the correct forms are filled out.

Do I also have to pay federal taxes?

The short answer is yes. Just as W-2 employees pay FICA and federal taxes out of each paycheck, self-employed workers must pay the self-employment tax and federal taxes. The thresholds for federal taxes are different though.

All employees with income over $11,400 must pay federal taxes, while workers making less than $11,400 are exempt. For example, if you made $10,000 in the most recent year as a self-employed worker, you would be exempt from filing a federal tax return. However, since that amount is above the $400 benchmark for the self-employment tax, you would still be required to file. Meanwhile, a W-2 worker who made the exact same amount ($10,000) wouldn’t have to file a tax return at all.

What about business expenses?

As a self-employed worker, there are certain expenses that you incur that can lessen your net income. If your job requires traveling and lodging, these expenses can potentially be deducted. Another example is if you work from home, you probably have operating costs like internet bills, equipment upgrades, and mileage. There’s an algorithm to calculate the worth of your home office so you can find out what can be deducted.

Other business expenses that could be deducted are things like advertising costs, business insurance, rent, education, meals and more. It is important to research the necessary guidelines to see which ones you qualify for.

Recent tax law changes

It is also important to keep in mind that the Tax Cuts and Jobs Act eliminated a lot of deductions. In the past, you could write-off entertainment expenses so if you took a client or potential client to a show, that could be deducted as well. However, the new law eliminated this deduction as well as the domestic production activities deduction and the local lobbying expenses deduction. The change also added limits to deductions that employers pay to employees.

Use TaxSlayer for self-employed taxes

Knowing which taxes you’re responsible for as a self-employed worker is a lot to manage, not to mention finding new business, maintaining the quality of your product and everything else that goes into working for yourself. That’s all the more reason to leverage TaxSlayer for your tax return and let us worry about which forms to fill out and calculating how much the square footage of your home office deducts from your net income.

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