In our post-pandemic era, many people have shifted their schedules and found that returning to the daily grind of full-time employment just isn’t their forte. But being self-employed means that you are responsible for paying taxes on your own. There was something comforting about your former company taking care of it all and just writing you a check – but fear not, you can navigate your taxes easily with this guide!
Know Your Entity
The first and most critical step to your new life of being self-employed is making the decisions about how you want to structure your business. It can be a sole proprietorship, S-corporation, C-corporation, a partnership, or a Limited Liability Company which may be taxed as be a sole proprietorship, S-corporation, C-corporation, a partnership depending upon the number of its members. The type of business structure that you choose will directly relate to how taxable income translates to your personal taxes.
Sole Proprietor
As a sole proprietor, your expenses and business income need to be reported via a Schedule C. Being a sole proprietor means you will be responsible for paying self-employment taxes, like Medicare and Social Security.
Corporations and Partnerships
For businesses that have more than two owners, you will likely file as a corporation or partnership. If you choose a partnership, you will probably have to file an information return, but it’s likely you won’t have to pay federal income tax. Tax documents that taxpayers and businesses have to file are used to report each person’s share of the S-corporation or partnership income to the government. This means the owners are taxes on the share of the income or loss of these type entities.
C-corporations differ because they are essentially a tax-paying entity for federal tax purposes only. A C-corporation may be allowed special deductions. It also means that you will be taxed on a corporate scale and at the entity level.
S-corporations operate like partnerships regarding your personal income tax. But they are similar to C-corporations because you typically have a salary from which payroll taxes are withheld at a corporate scale for owners. All of your earned income is reported on a W-2 at year-end. Further you may report shares of income or loss attributable to your ownership of the entities.
An S-corporation has the advantage of setting a salary, which has to be around specific guidelines. You can be penalized, however, if you set the salary is not reasonable for the services you provide. The government may adjust your salary upward out of your share of the income of the entity.
An LLC is technically a legal structure and not recognized for tax purposes at a federal level; this means you must file either as a partnership, sole proprietor, or corporation.
Preparing for Tax Time
Now that you know what entity your business falls under, you can minimize the sting of tax season. The first step is to secure a tax ID number. A tax ID number is free, and it is a good idea to have one. You can give customers your number so they can supply you with a W-9 form. A tax ID is also required if you have employees.
If you work from home and have a separate space, then you can take a home office tax deduction. The only stipulation is that it has to be a space allocated solely to work.
Be very cognizant of tracking earnings and spending because you will need to know what went out and what came in for reporting purposes.
Tax Deductions
If you are self-employed, you can write off business automobile expenses. That means that you can take depreciation of the value of your car. Keep a written ledger of all the miles that you drive, as well as what the odometer reads at the start and the end of the year.
You can choose a standard deduction or actual expense deduction, whichever is more. For vehicles that are over 6k pounds, there are special tax rules concerning the expensing of the vehicle. Other deductions to consider are:
- Reference resources
- Travel expenses
- Supplies for your office
A Heavy Responsibility
Being self-employed sometimes comes with greater freedom – but not with taxes. You not only have to pay income taxes; you pay self-employment tax on the earnings which contributes to the Social Security and Medicare system and your coverage within the same. If you are selling goods at retail, you might have to pay sales tax, which is a surcharge applied at the state level. If you don’t collect sales tax, it might behoove you to pay for what your customers did not. You might also have to pay use tax, which is related to the items that customers buy and should have paid sales tax on but did not.
Finally, if you employ people, then you will have to take care of payroll for yourself and others, which can be another hurdle. With self-employment comes a lot of personal choice and flexibility, but for tax purposes, it comes with additional responsibility.
The best way to stay ahead of the game is to hire an accountant to take care of everything so that you are compliant, can take all the deductions allowed, and so that you never get into trouble for owing more than you should. Hire the experts at our firm, we take the guesswork out of self-employment taxes. Contact us today to get started!