Tax Guide for the Self-Employed

Tax Guide for the Self-Employed

October 14, 2021

Understanding self-employed tax rules can feel like a minefield. When you’re already spending large amounts of time running a business, keeping the books and producing a great service or product, taxes are probably the last thing you want to tackle.

Unfortunately, the IRS is adamant about everyone paying their fair share—and it’s always best when you get it done right the first time. Here’s what you need to know about taxes if you’re self-employed.

Who qualifies as self-employed?

The IRS has three major categories of self-employed people: sole proprietors and independent contractors, being a member of a business or trade partnership or someone who is “otherwise in business” for themselves, including part-time business owners.

What are my self-employment tax obligations?

Being self-employed means that you have to pay a self-employment tax along with regular income tax. That’s because when you’re employed by a regular employer, you share the Social Security and Medicare tax burden—about eight percent each.

When you’re self-employed, that entire tax burden is on you. You’ll pay 12.4 percent toward Social Security and 2.9 percent toward Medicare. Currently, that applies only to the first $137,700 earned in a year for the Social Security tax. Any wages above that are exempt. For Medicare, wages above $200,000 a year are taxed at 3.8 percent. There is no cap that would exempt higher wages.

If you only made $400 in self-employment income, you are exempt from self-employment—unless you’re a clergy member employed by a congregation. In that event, your entire salary is exempt.

What deductions and credits are available?

On average, self-employed people pay higher taxes. However, you may be able to leverage losses and costs to lower your tax liability. The best way to do this is to work with a skilled accountant, who can help you estimate your tax liability and find the best deductions.

Here are some of the deductions you may qualify for:

  • Startup costs: If you started your business in this tax year, you can write off startup costs like marketing, legal fees and advertising.
  • Home office: When you have a dedicated home office, which is only used for work, you can deduct a portion of your rent and mortgage, property taxes and more.
  • Vehicle expenses: Generally, you can deduct up to $25,000 in legal fees, on top of mileage deductions.
  • Supplies and equipment: If you purchased any supplies or equipment for your business—like printer ink, paper, office supplies, computers and more—you can deduct those expenses.
  • Health insurance: Some self-employed people may be eligible to deduct health care costs for themselves and their families.
  • Social Security and Medicare taxes: You can write off half of your Social Security and Medicare taxes at the end of the year.

As you can see, there are some advantages to being self-employed. When you’re not sure you understand self-employed tax rules, it’s best to work with an accountant. They can help ensure you get the highest possible credits and deductions. Call Kedean’s Generation to learn more.

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