While there are advantages in being self-employed, taxes can be more complicated for self-employed individuals than those who work for someone else. Additional tax forms will require filing to meet IRS guidelines. And due to such complications, there is a greater increase of mistakes made during filing that could lead to a higher chance of audits and criminal penalties.
The IRS has specific criteria that apply to self-employed taxpayers. By being self-employed or an independent contractor, there will be nothing withheld from your paycheck. You also will not have an employer who will make Social Security and Medicare contributions on your behalf. Regarding these two items, you will be responsible for the entire contribution.
The threshold for being considered self-employed by the IRS is only $400 in self-employment earnings. In the event you make at least this amount of earnings, you may need to make quarterly payments to pay your income, Social Security and Medicare taxes. To figure out what your quarterly payments should be, this would require the filing of special forms in estimating the amount of taxes you owe.
As a self-employed individual, you will want to take advantage of any available tax deductions including ordinary and necessary business expenses. This can include home office expenses and license fees. However, it’s extremely important to differentiate between business expenses and personal expenses. Any attempt to deduct personal expenditures could result in a tax audit.
When filing self-employment taxes and forms concerning estimated taxes, it’s important to calculate correctly what we owe and need to pay. It’s for this reason that attorneys that understand the tax laws and who routinely help small businesses out with their taxes can be of great assistance. This guidance is important in avoiding tax penalties. Also, it provides you a better idea as to how much income you earn in the eyes of the IRS, and what you owe in taxes.