- February 21, 2020
- Posted by: asal
- Categories: Back Tax Help, how to file for back taxes, Tax Resolution
Financial aspects of a self-employed person are different from other taxpayers. A self-employed taxpayer is not working for a specific employer who is paying them a regular income. They earn money through contracts with a business directly. In most cases, the employer will not be withholding taxes. So, it is your responsibility to pay the taxes yourself or get back tax help. Although, the exact definition of self-employment is different among the Internal Revenue Service (IRS), the US Bureau of Labor Statistics (BLS), and private research firms. Generally speaking, the self-employed involved individuals working in partnerships, independent contractors, and sole proprietors of businesses.
Difference between Self-employed Vs Business Owner
Self-employed taxpayers are different from business owners. A self-employed person owns the business and is the sole or primary operator. A business owner, on the other hand, might have an ownership stake but are not necessarily involved in the day-to-day operations of the organization. So, the taxation rules applicable to self-employed people are different from that of a business owner. This can be a little complicated. So, it is better to get help with back taxes. Basically, you are self-employed if you:
- Work for yourself and contract with the works directly.
- Don’t receive health benefits like health plans.
- Are responsible to pay their taxes as they are not subjected to tax withholding.
Types of Self-Employment
There are mainly two types of self-employment:
- Independent contractors
These are the individuals or businesses that are hired for doing specific jobs. They will be receiving payment for their jobs. Since they are not the employees of the organization, they will not be receiving workers; compensation or any other benefits. They are not eligible for equal opportunity laws and their clients won’t withhold taxes from their payment. Some examples of independent contractors include lawyers, accountants, or freelance workers. Independent contractors are not limited to a specific field. In 2018, an NPR/Marist poll was conducted that found that one out of 5 jobs in the country is contract work instead of full-time.
- Sole proprietors
They are the sole owners of unincorporated businesses. Usually, in a partnership, two or more self-employed people come together to form a business. Partnerships, independent contractors, and sole proprietors can hire some people to help them with their work. The industries with the maximum number of self-employed people include agricultural, business, construction, and professional services.
Things you should know about Tax
- It is more than the income tax.
Apart from income taxes, there is a self-employment tax that covers Medicare and Social Security taxes. This is normally split between the employers and the employees. Here is how the self-employment tax worked for 2018:
- 3% of the first $128,400 of earned income. If you are earning $50,000 from a regular paying job, you will be assessed the 15.3% self-employment tax on the remaining $78,400 of income.
- 9% of the amount over the limit. This is the social security tax that is limited to the maximum income. Medicare tax does not have this limitation.
So, your self-employed income will be adding a hefty amount to the tax bill. To get the right help with back taxes, you can hire a tax relief expert.
- No one is going to be withholding your taxes
When you are making a transition from being an employee to self-employed, this will be the biggest change. The payroll process of the employer usually pays the taxes during the year. If you are earning a regular income as a self-employed income, you might think that the former will cover everything. But, you may end up owing money to the IRS. Apart from the self-employment tax, your additional income might put you into a higher tax bracket. So, you need a plan that covers them both. So, you should set some money aside from each payment for the taxes. You can hire a tax resolution service for some back tax help.
- It’s not good enough to pay with your tax return
If you are planning to pay your tax bill with your tax return, it might not be enough and lead to a large penalty. Self-employed taxpayers have to make quarterly estimated tax payments to the IRS. This is the same as to how an employer is withholding money from your paycheck. For example, you owe $10,000 to the IRS in taxes. So, you have to send $2,500 to the IRS every three months. You can’t just pay $10,000 in one go when you are filing your tax return.
Failure to make the regular payments throughout the year, you will end up penalized for not paying the taxes on time. If you owe the IRS less than $1,000 or pay at least 90% of the tax amount through withholdings and estimated payments, you might be able to avoid the penalty. Also, if you have paid the full amount of last year’s tax, you might not be penalized. To understand all of this, it is best to get back taxes help from tax relief experts.
- Lucrative tax deductions
Tax implications for self-employed people are not all bad. There are certain tax deductions that you can be eligible for. You can use them for slashing your tax bills. Here are a few examples:
- According to the Tax Cuts and Jobs Act, there is a provision allowing a 20% deduction for pass-through income. This is for the LLC, S-Corp, or sole proprietor. Self-employed people can be eligible for this.
- If your business involves the transportation of people or things, you can deduct the vehicle’s mileage.
- If your home is the primary location, you can be eligible for the home office deduction.
- You can make deductions for office supplies, cost of business travel and other expenses.
- You can take advantage of retirement accounts like individual 401(k)s, SIMPLE IRAs, and SEP-IRAs. This will allow you to keep a significant portion of your income on a tax-deferred basis.
As a self-employed individual, you have a lot to consider about the taxes. So, help yourself by hiring professionals. Platinum Tax Defenders is a tax resolution service that can help you with your taxes, deductions, audits, etc. They are the one-stop-shop for any back tax help. Our tax relief experts will help you file your taxes and get the most out of the returns. So, book an appointment with the Platinum Tax Defenders today!