Being your own boss is a dream that most people wish for, and you're doing it! It's a huge responsibility but also one of the most rewarding. As Tony A. Gaskins once said, "If you don't build your dream, someone will hire you to build theirs." And there's no better feeling than taking that significant step forward — but there are some important steps to consider first.
At the top of that list is your taxes. Now that you're self-employed, you will be expected by the IRS (Internal Revenue Service) to file your net earnings from self-employment. If you don't file, you could be looking at consequences such as failure to file fees, late filing penalties, and, worst-case scenarios, jail time.
Here's a helpful step-by-step guide for preparing and filing your self-employment taxes on your own.
If you still decide you need help through the process, no worries! Schwartz can help you file, so you can spend more time on increasing your bottom line.
The IRS classifies you as self-employed if you meet one of the following:
In most cases, self-employed individuals must pay self-employment tax (SE tax) and income tax. Anything equal to or more than $400 will require a self-employment tax payment. Although you must still report an income of less than $400 when working for yourself, you do not have to pay taxes on those net earnings.
The IRS does say, however, that "you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 and 1040-SR instructions" when making less than $400.
You should note that an SE tax does not include ALL taxes you may file. It only refers to Social Security and Medicare taxes and not any other tax (like income tax).
SE tax is a Social Security and Medicare tax mostly for people working for themselves. It is comparable to the Social Security and Medicare taxes withheld from people who work for a wage or salary. The difference is when you work for a company, they pay a portion of the SE taxes owed. When you work for yourself, the responsibility falls on you alone.
You are expected to have your taxes filed by Tax Day (April 18th) every year. The only exception is when the IRS announces extension dates like those given in 2021. However, it is better to get them prepared and filed as soon as possible to avoid late fees.
Here's how to file your SE taxes.
Knowing which entity your business falls under is important because it will shape your entire tax process. In fact, deciding how your business will be categorized is one of the very first decisions you will make.
Your options will include:
Whether you're deciding to file on your own or send your taxes to a tax professional you will need to collect the following paperwork ahead of time:
Deductions will be important when filing your SE taxes because they will lower your taxable income. This, in turn, reduces how much you will owe when you file.
You'll want to claim as many deductions as possible to benefit the most. For this reason, most businesses work with a tax professional to save money. The most common are:
You can calculate your taxes in one of three ways:
No matter which method you use, you will follow up by officially submitting your taxes for the year.
If you're a South Jersey small business owner and in need of more guidance when filing your taxes, feel free to reach out to Schwartz for more support. A lot goes into properly preparing and filing your self-employment taxes. So, while you can file on your own, it can be more beneficial to work with a tax professional to ensure you're benefiting the most and paying out as little as possible. Contact us to get started!