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Posted by on Dec 10, 2012 in Uncategorized | 0 comments

Business Taxes for Self-Employed Rock Stars

photo credit: realbalancewellness.wordpress.com

Making the move from being gainfully employed to be self-employed can be scary, and navigating the rules surrounding business taxes can be the scariest part of all. As an independent contractor or sole proprietor, you’re flung into a murky world of IRS requirements that most “normal” folks never have to deal with. Don’t fear, you indie rock star, you – below is a comprehensive breakdown of everything you need to know about your business taxes.

1. Make sure you’re actually, well, self-employed

You may very well work for your (dang) self, but what does Uncle Sam think? A formal declaration of your intentions needs to be made to the IRS, sort of like you’re courting someone’s daughter in the 18th century. What are you intentions, young man? The IRS applies the rules surrounding self-employed business taxes to people who are

  • Independent contractors
  • Sole proprietors
  • Half of a partnership
  • Owners of a part time business

If you’re involved with any of the above, you are self-employed according to the government. Even if you haven’t made the leap from independent contractor to a sole proprietorship, you’re still responsible for a variety of tax obligations.

2. Double the payments, double the fun?

Newsflash: Self-employed folk must pay income tax AND a self-employment tax. Now before you start heading for the picket line (“It’s not fair!”), your self-employment tax doesn’t really have anything to do with business taxes. It’s actually a substitute for the Medicare and Social Security taxes your employer used to take out of your check. So don’t worry, the IRS isn’t taxing you because you’re self-employed; they’re just taking out exactly what was being withheld before.

3. Estimation Station

Are you making multiple, quarterly tax payments to the IRS each year? Your business taxes as a self-employed lady or gent need to be estimated and paid each quarter using a nifty worksheet called “Form 1040-ES” (poetry, sheer poetry!) Each quarter, Sam wants you to estimate how much you’re going to make for the year, and pay taxes on that. If you over or undershoot it, no worries. You’ll either be reimbursed on your tax return, or have to make up the difference the following quarter.

4. Ye Olde Tax Return

Now that you’re self-employed, you can chuck the 1040EZ form out the window, cause things just got real. First of all, determine what kind of business you’re running (see #1 above). If you’re a sole proprietorship, you’ll need one form to declare business taxes. If you’re an independent contractor who’s formed an LLC, you’ll need another. Common income tax returns for the self-employed include:

  • Schedule C, for self-employed people with over $5,000 in business expenses
  • Schedule C-EZ, for people who spent less than $5,000 on business expenses
  • Schedule SE (Form 1040), Self-Employment Tax for everyone to declare those quarterly payments they’ve been making all year

5. Just for fun?

Wait a second – are you sure your business is, in fact, a business? If what you’re operating is on a part time basis, or if it’s actually more of a hobby, your responsibilities concerning business taxes may change significantly. Now, don’t get us wrong here – if your primary reason for doing what you’re doing is to make money, it’s a business. But sometimes hobbies can generate losses and even income, both of which need to be claimed on your tax return.

Your hobby becomes a business only when it “makes a profit during at least three of the last five tax years, including the current year.” The Small Business Administration has some great information on this topic at www.sba.gov/content/it-business-or-hobby.

Making the transition to self-employment can seem overwhelming, but it’s not that complicated. Especially if you check out these handy IRS videos about doing just that: irsvideos.gov/virtualworkshop/.

What’s the one thing you wish you’d known before becoming self-employed?