Tax Considerations When You’re Self-Employed
Do you have your own business, work for a ridesharing or delivery app like Uber, or take freelance work? If so, then you are considered self-employed in the eyes of the IRS. When you have self-employment income, your tax situation will look different compared to being an employee.
At Northside Tax Service, we are only able to file self-employment income that is reported on a Schedule C so that is what we will focus on in this blog post. You will most likely need to file a Schedule C if you are a sole proprietor, independent contractor, gig worker/freelancer, or a single-member LLC, unless you opted to be taxed otherwise.
Filing Requirements
Self-employed individuals are required to file if they earn more than $400 in self-employment income. The filing requirements are significantly lower than if you are an employee, where in 2022, if you’re single, you must file a tax return if your gross income was at least $12,950. So, even if your only income in 2022 was $500 from self-employment, you must still file a tax return.
Business Entity
Your business structure determines what tax forms you need to file. The default for sole proprietors and single-member LLCs is a Schedule C with their 1040 tax return. Multi-member LLCs, partnerships, S-corps, and C-corps have separate filing requirements outside of the Individual 1040 tax return that you’re used to filing.
Self-Employment Tax
When you’re self-employed, you need to pay self-employment tax. As an employee, your employer typically withholds your share of Social Security, Medicare, and income tax from your paycheck. Being self-employed means that you need to make these payments yourself. However, if you have another job, you can also ask your employer to increase your withholding by filling out a new Form W-4.
Estimated Tax Payments
If you expect to owe more than $1,000 of tax based on your self-employment income, then you will need to make quarterly estimated tax payments based on how much you expect to owe for the year. It’s important you stay on top of these deadlines to avoid paying interest and penalties.
Business Deductions
A major perk of being self-employed is being able to claim deductions for certain business expenses. This includes may include home office expenses, mileage, supplies, inventory, shipping, etc. If you have questions about whether you can deduct something, you should seek advice from a tax professional.
Recordkeeping
When you claim business deductions, you must keep proper documentation! If the IRS questions the legitimacy of certain business expenses, you will need receipts and documentation to support yourself in an audit. This is where complete and accurate bookkeeping is critical.
Tax Planning
As you can see, taxes can become a lot more complicated once you’re self-employed. It’s a good idea to meet with a tax advisor during the course of the year to make sure you’re on track for a smooth tax season. At Northside Tax Service, we provide consultations to help clients plan for the future and understand their tax obligations. If you’d like to meet with one of our tax professionals, please feel free to give us a call at (360) 922-0235. We’d be happy to help you on your business journey!
Disclaimer: This material is prepared for informational purposes only, and is not tax advice. Please speak with a tax professional or view the resources below to see how this information may apply to you.
