Being your own boss and/or being the boss of others is a difficult and daunting endeavour.
Sure, it’s great that when you work for yourself you are no longer a “slave to the man,” but simultaneously it’s intimidating because you must accurately report all of your income and expenses to the IRS every year.
If you are a self-employed person, an independent contractor, or plan on becoming one, you have come to the right place!
One of the overall goals at Tax On Tax Off is to provide you with as many excellent tips for deducting business expenses as possible.
Before we do that however, we feel it best to start out with an introductory article for those not as well versed in the self-employed arena.
Today and onward, we are going to de-mystify technical jargon, feed you informative stats, and explain the current climate for self-employed people as clearly as possible.
Before we get into whether or not you can deduct your Gym Membership (sorry bro) and your new Gucci suit (nope), we are going to cover five important areas that self-employed people will benefit from knowing:
Five Important Tax Facts for the Self Employed
1. The terms sole-proprietor and self-employed person pretty much mean the same thing
In general you can classify yourself as any of these two terms. The important thing is that you are carrying on a trade or business with the intent of making a profit. Most of the time, the term independent contractor is very similar to these two terms but not as synonymous because you can be both incorporated and an independent contractor.
2. Self-employed persons report their business income or loss on Schedule C of IRS Form 1040
Self-employment tax is calculated on Schedule SE, which is also part of IRS Form 1040. If your estimated tax liability exceeds $1,000 U.S. dollars, estimated taxes should be paid quarterly using form 1040-ES (FYI the ES stands for ‘estimated’). If you choose not to pay estimated taxes the IRS will very likely choose to charge you interest and penalties.
3. The amount you pay in self-employment tax is based completely upon your net self-employment income
What is “net” income you ask?
“Net income,” to keep it simple is your gross income less your business expenses. Expenses can range from property tax to freight to your everyday business expenses. Having well-kept, contemporaneous records will assure greater piece-of-mind come tax time.
4. The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011
The self-employment tax rate for self-employment income earned in 2011 is 13.3% (10.4% for Social Security and 2.9% for Medicare). By comparison, for self-employment income earned in 2010, the self-employment tax rate was 15.3%. The rate consists of two parts: 12.4% for social security and 2.9% for Medicare.
5. You are not alone in your journey as a sole-proprietor and there are resources available to help you
And we’re not just talking about the kind folks at Tax On Tax Off of course!
In fact, approximately one-quarter of the working population in America identify as a sole-proprietor. You can join the National Association for the Self-Employed or visit their website at www.nase.org for continued information and on-going support for your line of work.
Of the five areas outlined above, the most important facts for you to remember as someone reading this is that the self-employment tax rate for 2011 is 2% lower than in prior years and that if you have an estimated tax liability of $1,000 or more you should strongly consider making estimated tax payments every quarter.
Now that we have gone over the essential facts of being self-employed, in our next article we will delve into properly deducting those pesky business expenses of yours. Stay tuned for an article aptly titled: Deductions for the Self-Employed.
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