There are many perks to being self-employed. Keeping your own hours, not needing budget approval, and being your own boss — to name just a few. Unfortunately, not having to pay taxes isn’t on that list.
If you are self-employed, the government requires you to report your income and pay both self-employment and income taxes. So, you shouldn’t be asking yourself if you have to pay taxes, but how you should pay them.
Self-employment status involves unique tax obligations and requires considerably more organization and recordkeeping than working as a traditional employee. Please keep reading to learn how to pay self-employment taxes.
4 Common Types of Self-Employment
Identifying as self-employed and determining your exact status can be confusing. Let’s learn the four common types of self-employment.
Do you freelance on the side or own a small business? If so, the IRS considers you a sole proprietor (even if you form an LLC). Many small businesses start this way, though some transition to a different structure as they grow. Sole proprietors report their business income and expenses on a Schedule C, an attachment to their personal income tax return. They have the greatest flexibility in choosing how to manage their business.
Our tax laws define a partnership as a business, other than a corporation, that has several owners who share its profits. Partnerships file an informational tax return, Form 1065, but the individual partners each pay a share of the business’ taxes. You can form a partnership without registering your business, but it’s usually best to form an LLC (limited liability company) or another state-law business entity.
Partnerships have less flexibility in management choices than sole proprietorships, and must comply with state partnership laws and the business’s partnership agreement.
Corporations or LLCs that meet certain strict criteria may choose to be S corporations for tax purposes. S corporations may have as few as one or as many as one hundred owners, called shareholders. Like partnerships, S corporations file their own tax returns, but the owners pay the taxes on their share of the profits. After hitting certain growth points, many sole proprietors choose to convert their business to an S corp.
Types of Taxes and Filings Required for the Self-Employed
Before you begin filing, you must understand which taxes you are required to pay and when.
- Federal self-employment tax: You are both the employer and the employee, meaning you have to pay both halves of your Social Security and Medicare contributions (rather than just the employee half). This extra tax is known as self-employment tax.
- Federal income tax: When we say everyone is required to pay taxes, we’re referring to federal taxes, which make up the bulk of your taxes.
- State income tax: Maryland also requires the self-employed to pay taxes on their income.
- Estimated payments: Instead of having taxes withheld from your paycheck like an employee, it is up to you to track your income and self-employment tax responsibilities and pay quarterly income tax deposits.
- Annual filing: Although you’ve been calculating and paying quarterly taxes, you’ll still need to complete the annual filing to get your refund and to square your estimated payments.
A Tax Survival Guide For the Self-Employed
Now that we know which types of taxes you are required to pay as a self-employed individual, let’s examine how to keep the most of your employment income.
1. Track Your Expenses and Depreciation
Expenses are generally payments for services, supplies, or other things your business will use up within a year. Reasonable business expenses are tax-deductible. If you expect to get many years’ use out of your equipment and facilities, you can deduct a portion of the purchase price each year for several years.
Keep detailed records, such as receipts or mileage logs, to show how much you spent on what, when, and for what purpose.
2. Record Your Revenue
Depending on your business and clientele, you may not get 1099s to account for all your earnings. Therefore, you need to keep track of your business earnings for the year.
You’ll likely have a variety of checks, wire transfers, and other payment methods received from a multitude of clients. Detailed recordkeeping will be crucial when tax season comes around.
3. Review All of Your Paperwork
Assuming you’ve been organizing and recording your expenses and revenue all year long, this next step should be simple. Collect all of your records and 1099s, and double-check that everything matches up. Even if you don’t receive a 1099 from a client, you’ll still need to report your revenue from them to the IRS.
S.H. Block Tax Services Can Help With Self-Employment Taxes
Trying to file your own taxes when you’re self-employed can be a massive headache. From keeping track of your records to determining which forms you need to receive and which forms you need to complete, there’s a lot to remember. And you don’t want to forget an estimated quarterly payment, or you could be facing serious fines and penalties.
If you want to focus on your business and ensure the accuracy of your tax filing, S.H. Block Tax Services is here to help.
We have bookkeeping and tax filing experts available to help with all your business and tax needs. Please contact us today by calling (410) 793-1231 or completing this brief online form to get started.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.