How To Claim Self Employment On Taxes – The allure of “writing off” can make them feel magical, like they become unlocked once you own a business and make a lot of money.

A tax write-off (also known as a tax deduction) is an expense you can use to reduce your taxable income.

How To Claim Self Employment On Taxes

How To Claim Self Employment On Taxes

Real-life example: If you earned $80,000 as a freelancer last year and had $15,000 in eligible business expenses, you could “write off” that $15,000 against your taxable income ($80,000) because you’ll have only pay taxes on $65,000.

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For an expense to qualify as a write-off, the IRS says it must be ordinary and necessary for your business.

Unfortunately, that means you can’t write off a year’s worth of DoorDash deliveries to your home office 🚗

These next few paragraphs are a bit into the weeds, but let’s take it a step further and see what writing off looks like in practice:

First, your business income is reported on Schedule C (Form 1040). This is also where your write-off will be done to calculate the company’s net profit or loss.

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For example, let’s say you have $70,000 in revenue from your freelance business and $50,000 in net profit (i.e., after deductions).

After you know your business income, self-employment taxes are calculated and reported on Schedule SE – Form 1040 (below).

Based on the above scenario with a profit of $50,000, your self-employment tax would be about $7,650, and your income tax (for a single filer) would be about $2,600 (federal) and $1,200 (4% state). ) or ~$11,450 in total tax.

How To Claim Self Employment On Taxes

If you didn’t take the write-off and paid both self-employment and income tax on the full $70,000, you’d owe about $10,700 in tax and nearly $6,500 in income tax, or $17,200. In total.

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So with $20,000 worth of deductions, that person would save nearly $6,000 more in taxes than if they didn’t.

Another deduction: After calculating your self-employment tax, you can make an “income adjustment” on Form 1040 (Schedule 1) for half the self-employment tax amount, which will further reduce your taxable income and tax bill.

So using the same numbers from the example above, this person could write off $3,825 in self-employment tax, which would save another ~$840 in taxes.

Numbers and calculations. If you’re using something like HR Block, you’ll be entering your information into their forms and it won’t look like the actual IRS tax forms mentioned above – less confusing, but still not easy. If you use an accountant, you will upload or send your relevant documents and they will take care of almost everything else.

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If you claim specific deductions, this is considered “itemized”. Business deductions are always itemized, but you likely don’t itemize your personal deductions.

Because anyone in the US can claim the standard deduction ($12,950 for singles in 2022) on their income taxes, and 87% of taxpayers claim the standard deduction.

Those who don’t take the standard deduction tend to be high earners ($200,000+) who use strategies like charitable giving to lower their tax bill, so their benefits exceed what the $12,950 deduction would provide.

How To Claim Self Employment On Taxes

But if you’re a business owner (or receive 1099 income), most of your deductible expenses relate to the business, not your personal finances.

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So after you’ve filled out your company’s Schedule C, claimed deductions, and claimed self-employment tax, you should report the income on your 1040 and then generally claim the standard deduction.

I had some W-2 income on line 1 because I didn’t quit until June of that year.

Most of those losses were from start-up costs and monthly expenses (both deductible) before the company became profitable. But that loss brought my total earnings down to $18,557.

After that, I was still able to take the standard deduction ($12,400 at the time) to further reduce my income until there was only $6,156 left to be taxed.

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Since I didn’t have any big, itemized personal deductions to take, the standard deduction of $12,400 was enough and I was still able to write off business expenses as well.

But what about estimated quarterly taxes? If I don’t know what my final deductions are by the end of the year, how can I avoid overpaying?

This is why tax planning is so important. But for starters, if you expect to owe more than $1,000 in taxes for the year, you should make estimated quarterly payments to the IRS.

How To Claim Self Employment On Taxes

The key word here is estimated because you are right, you won’t know the exact amounts until the end of the year.

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You can use an estimating calculator to figure out how much you should pay to the IRS based on what you plan to do, but you need to have a general idea of ​​your expected expenses, and then you can make near-accurate payments based on your projections.

If you’ve been freelancing for a few years, you should already have a general idea of ​​your total tax bill based on your income, so you can use past payments to help determine future payments.

You have to spend money to see the benefits of tax write-offs, which is why they can be so powerful for small businesses. Businesses, regardless of size, need money to operate, so the IRS rewards your entrepreneurial efforts with tax breaks.

But if your business has a recurring expense or a large purchase that would help your business grow and qualify as a write-off, take deductions and save that (tax) money 💸

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Disclaimer: This should be considered “educational only” and should not be considered investment, tax or legal advice for legal purposes.

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How To Claim Self Employment On Taxes

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Publication 560 (2022), Retirement Plans For Small Business

For full-time workers, taxes are usually out of sight and out of mind until the filing deadline each April. But for the self-employed, whether you have a part-time hobby, a full-time freelance job, or a thriving small business, taxes are a regular part of managing your business and personal finances.

If your employer doesn’t automatically withhold taxes from your wages, you need to determine your tax liability, including how much you owe and when and how to pay. While some taxes will be familiar, like state or federal income taxes, there’s also a whole new category to consider when you’re self-employed: self-employment taxes.

The self-employment tax, officially known as the Self-Employment Contribution Act (SECA) tax, is a contribution by self-employed individuals to the federal government to fund the Social Security and Medicare programs. You are considered self-employed if you are a freelancer, gig worker, independent contractor, sole proprietor, or small business owner.

Although full-time workers also pay Social Security taxes and Medicare taxes, they share the cost with employers under the Federal Insurance Contributions Act (FICA): workers pay 6.2% of gross earnings to Social Security and 1.45% to Medicare in each paycheck . , and their employers match those percentages, totaling 15.3%. However, the self-employed are responsible for the full 15.3% tax rate: 12.4% for Social Security and 2.9% for Medicare.

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Anyone who earns $400 or more in self-employment income generally has to pay self-employment tax. You must pay this tax on your net self-employment income (your income after business expenses).

The tax is split into two parts, Social Security and Medicare, and how much you pay for each part is calculated differently.

Starting in 2022, self-employed individuals must pay 12.4% of Social Security on their first $147,000 of net income. If you earn more than $147,000 a year, the rest of your income is not taxed for Social Security purposes.

How To Claim Self Employment On Taxes

Starting in 2022, self-employed individuals pay 2.9% of their first $200,000 of net income for Medicare. (If you’re married, you’ll pay 2.9% of the first $250,000 of combined self-employment income to be filed jointly, or $125,000 if you file separately.) For income over $200,000 ($250,000 for those who married filing jointly; $125,000 for married filing separately), you’ll pay an additional 0.9% in Medicare taxes (meaning your tax rate rises to 3.8% on all income above threshold).

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The US has a pay-as-you-go tax system, which means that people pay taxes as they earn money throughout the year. Employers withhold taxes from the wages of full-time employees and pay them to the government on their behalf. However, it’s a bit more complicated for the self-employed.

If you expect to owe more than $1,000 a year in taxes, you are responsible for making estimated tax payments to the IRS quarterly by mail, online, or using the IRS2Go app. These tax payments include both income tax and self-employment tax. At the end of the year, you’ll also file your annual tax return using Schedule SE

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