Self Employment Tax Reporting
Self employment tax reporting is an add on tax liability on page 2 of you tax form 1040. Some first time self employed individuals do not understand why is it that they must pay this tax.
Income Reporting
A self employed individual is an unincorporated business, (ex. sole proprietor, independent contractor, or partnership). At year’s end you should receive a form 1099-Misc. If you received $600 or more in payout from the payee who hired you. One way the Internal Revenue Service (IRS) verify whether you correctly reported your income is through income matching. Payees are required to submit form 1099-Misc for payouts of $600 or more. The IRS matches your tax return income reported to all 1099-Misc forms submitted under your SSN or EIN. Don’t take risks. Report the 1099-Misc. income from an ethical standpoint. Getting caught under reporting income results in severe penalties.
Estimated Taxes
If you earn net income of $400 or more, you have an obligation to file an annual tax return and pay estimated taxes quarterly. Pay your taxes on your net profits. What you need to understand is that self-employment taxes is for your benefit. Payments are credited to the Social Security and Medicare system. The benefit for later years when you become eligible for retirement. You saw these deductions on your paycheck when you were a W2 employee. Employer are required to withhold funds and pay them to the Social Security Administration. As a self employed individual, you take on that responsibility and that is the reason for you having to fill out schedule SE (self-employment tax) along with schedule C or C-EZ. On your tax form 1040, you are allowed to adjust or reduce one half of the total self-employment tax from your total income. A plus for being self-employed.
Other Taxes
Self-employment taxes are other taxes. These taxes will added to your tax liability. Which is below the itemized/standard deduction line. You will be responsible to pay them. I recommend you pay your estimated payments quarterly through Electronic Federal Tax Payment System (EFTPS) or using form 1040ES as required. When you make these payments, you alleviate yourself from coming up with a balloon payment and avoid penalties and late fees. If you or your spouse is an employee from other employment and have withholding, there maybe enough to cover your self-employment tax obligation. Further tax planning will need to be considered. This method is not the best or ideal way to cover your self-employment tax I caution you.
If you are self employed and need help estimating your quarterly tax payments, contact me today for an appointment, otherwise I encourage you to seek out a tax professional who is experienced in tax planning.
