SELF EMPLOYMENT TAX (SE TAX):
If you have non-employee, non-wage compensation you get for doing work where there are no taxes withheld then you are an independent contractor. Per IRS regulations that constitutes someone who is Self Employed and is required to pay Self Employment Tax (SE tax) on net earnings.
What is Net Earnings? That is your profit – the total income less your allowable expenses.
Self-employment income (net earnings) is taxed at a minimum of 25.3%. This is because the profit from a business is taxed for INCOME TAX (minimum tax rate of 10%) AND for SELF-EMPLOYMENT TAX (the business-owner’s version of Social Security which is 15.3%). So, if you and your spouse also have wages or earn more than $40,000 in net earnings, the taxes could be higher because the income tax rates increase as income increases.
So, at the minimum income tax bracket of 10% for every $10 dollars of expenses you find you will save at least $2.50 in taxes. Trust me, the minimal effort it takes to track your expenses is well worth it come tax time.
For more information on Self Employment expenses, please see the discussion under Self Employment & Independent Contractors.
While an individual may be very able to list the income and expenses, but the tax laws covering home businesses are very complex and change from year-to-year. It is ALWAYS a good idea to consult with a professional tax preparer.
ESTIMATED TAXES (ES TAX):
If you are self employed and/or end up owing taxes at the end of the year on a regular basis, you will
need to pay Estimated Taxes for the current year.
These are required quarterly payments to the IRS based on the amount of tax you owed in the prior year less any tax amounts being paid in by others (such as employers or investment companies). You are required to make the payments quarterly, but may make them monthly if you choose.
If you pay quarterly payments are due April 15, June 15, September 15 and January 15 of next year.
Your tax preparer can provide vouchers you can use to mail a check or you can pay online:
You can make online payments at https://www.IRS.gov/payments
- Use the ES option
- Double check the year – it should be for the current year except the January payment which will be the prior year
- Triple check the name and social security numbers
- ALWAYS print a copy of the payment proofs for your tax preparer