To understand how to save on taxes as a self-employed person, you must know which taxes you are required to pay. Here is an overview of the most important tax categories that can be applied to self-employed people.
Income tax
Regardless of whether you are a self-employed person, or an employee, everyone is obliged to pay income tax. This tax relates to the taxable profit made by a self-employed person (annual surplus). This is often the most important tax for the self-employed, as many company expenses can be deducted from income tax. If you can reduce your taxable profit, you reduce your tax liability. When filing for income tax, you will need to submit form 1040, U.S. Individual Income Tax Return, and either Schedule C (form 1040), Profit and Loss from Business, or Schedule C (form 1040) Net Profit from Business. If you operate more than one venture, you must submit a C form from each revenue source.
Estimated taxes
Estimated taxes are additional income taxes that must be paid for any additional income such as interest, dividends, alimony, capital gains, prizes, and awards. Sole proprietors and freelancers must pay estimated tax if they predict their tax payments to be more than $1000. Estimated tax can be worked out using form 1040-ES. Estimated taxes are paid quarterly.
Self-employment (SE) tax
This is a tax which combines social security and Medicare taxes and deducts them from your net income. SE tax is not paid by those that are traditionally employed, as those taxes have already been automatically deducted. SE tax means that self-employed people can also avail of social security benefits, such as retirement benefits, disability benefits, survivor benefits, and Medicare (hospital insurance) benefits. SE tax must be paid by those self-employed people whose earnings exceed $400, or those who obtained a church employee income of $108.28 or more. The SE tax rate is currently at 15.3% of your income. If you are liable to pay self-employment tax, then you must fill out form Schedule SE which is then filed with form 1040.
Federal unemployment tax
Along with state unemployment taxes, this tax goes towards providing unemployment benefits to people who have lost their jobs. You will need to submit form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
Excise tax
Excise tax, similar to sales tax, is a levy applied to specific consumer goods. Good examples include luxury items or controversial products, such as cigarettes or alcohol. Unlike sales tax, excise tax is a flat tax applied to the product before the purchase price, rather than a percentage of the sale price.
As a business owner, sole proprietor, or freelancer, you may have to pay excise tax depending on whether or not you engage in the following activities:
- Selling or manufacturing products that incur excise tax
- Operating certain kinds of business that are considered luxury services, i.e. tanning salons
- Using certain types of equipment, facilities, or products
- Receiving payment for certain types of activities
There are further taxes to be paid if you are involved in the sale of certain chemicals, fuel taxes, heavy vehicle tax, and communications and air transport tax. Excise taxes are filed using form 720, Quarterly Federal Excise Tax Return.
Information returns
As a business owner, sole proprietor, or freelancer, it is your responsibility to submit supporting documents for all your tax filings to the Internal Revenue System (IRS). They will then compare the documents you have supplied to the information on your tax returns to ensure that any and all payment transactions are properly accounted for. There are a number of forms you are also required to include in your submission:
Form 1099-MISC, Miscellaneous Income reports on the following incomes:
- Payments of $600 or above to people not considered employees
- Rental payments of $600 or more
- Prizes or awards of $600 or more
- Royalty payments of $10 or more
- Sales greater than $5,000 to people intending to resell outside of a permanent retail establishment.
form W-2, Wage and Tax Statement will need to be filed if you have employees to record information, such as their wages, tips, with-held income, social security, and Medicare taxes. Every employer engaged in a trade or business who pays remuneration, including noncash payments of $600 or more for the year must file a form W-2 for each employee.
Form 8300, Report of Cash Payments over 10,000 Received in a Trade or Business needs to be filed if you are party to a cash transactions greater than $10,000 in either the US or a foreign currency.