You are probably wondering how much tax do you pay if you are self employed? Taxes are a complex subject, but they do not have to be hard to figure out though. A few quick tips and tools will help you stay on top of your taxes.
You may just become the next expert and find yourself opening your next home business helping other self-employed with their tax questions and how to properly file their taxes.
In this self employed tax guide 2019, we’ll show you soloprenuer tax tips, as well as what qualifies as home expenses tax deduction.
Whether you’re working to make a little extra money on the side of your full-time job, or whether you’ve started working for yourself part or full time.
These are just a few among many trades for soloprenuers. Below is a tax guide for soloprenuers.
Filing taxes for the self-employed 1099 worker
You are probably wondering what’s the difference between filing taxes as a self employed individual as opposed to filing when you worked a salaried or hourly paying worker?
The short answer is, a difference in the form you use to file your taxes. As a self employed individual, you now file a 1099 tax form -a form used for self employed individuals to file their taxes.
And rather than your employer automatically deducting and sending payments for state and federal taxes, you now must do it yourself. Yup, that’s pretty much it!
How do you determine self-employment taxes as a work from home individual? We’ve laid out a basic 4 step process to help you determine income tax for the self employed throughout the year.
Before, it’s important you understand a few basic definitions when following this 4-step process.
Taxable Income: The income used to determine which respective tax brackets you fall under. This income is after all qualified tax deductions have been subtracted.
Tax Brackets: Income tiers, as defined by the IRS, that determine what percentage of your income is owed in taxes.
Total Taxes Bill: This is your gross tax bill, determined by taking your net taxable income and using the respective tax brackets to determine how much is owed in taxes. This is before any tax credits have been applied.
Tax Credits: Qualified expenses, as defined by the IRS, that one can use to deduct from their total tax bill. This is different than a tax deduction.
Self employment tax deductions are subtracted from your taxable income, and tax credits are subtracted from your total tax bill.
Net Tax Bill: The final dollar amount owed in taxes, after all qualified tax deductions and tax credits have been applied.
Use the 4-step process below as a work from home tax deductions calculator, to determine how much you owe in taxes as a self-employee or work from home individual: (refer to definitions above for better understanding of the 4-step process)
Gross business income – total business expenses = net business income.
Deduct qualified tax deductions & expenses from your net business income:
Net business income – qualified tax deductions = taxable income.
Your taxable income will tell you which tax bracket you fall into. Use this tax bracket to calculate your total taxes owed.
Taxable income x (your respective tax brackets) = total tax bill.
Determine if you qualify for any tax credits and subtract those tax credits from your total taxes owed. This is your net tax bill owed to Uncle Sam.
Total taxes owed – qualified tax credits = Net tax bill
It is always advised to seek the advice of a tax professional. But in efforts of understanding how to plan for tax expenses as a self employment individual, the above equation is a great starting point.
Example: Ruby Owns and runs her part time blog for extra income.
Ruby runs a blog in her spare time. She earns an extra $1,500 per month (or $18,000 per year) from her blogging income and has about $500 per month (or $6,000 per year) in total operating expenses.
She pays about $100 per month ($1,200 per year) for business insurance. She is a single mother with one child and qualifies for the Child Tax Credit and can reduce her tax bill by $500. How much does she owe in taxes?
- Determine her net business income:
- $18,000 – $6,000 = $12,000 net business income
- Deduct qualified tax expenses from your net business income: Ruby can deduct her business insurance from her net income as a qualified tax expense. (More common business deductions are listed further below)
- $12,000 – $1,200 = $10,800 taxable income
- Determine your tax bracket to calculate your total tax bill: Ruby made an extra $10,800 total in 2018 from her blog. Her corresponding tax brackets are 10% for the first $9,525 and 12% for the remaining $1,275.
- $9,525 x 10% = $952.50 tax bill
- $1,275 x 12% = $153 tax bill
- $952.50 + $153 = $1,105.50 total tax bill
- Subtract tax credits from total tax bill: Ruby qualifies for $500 in tax credits from the “Child Tax Credit” as defined by the IRS. This tax credit allows one to deduct certain expenses related to dependent children.
- $1,105.50 – $500 = $605.50 net tax bill
Ruby will owe about $605.50 in taxes from her part time blog. She seeks the professional advice of a trusted tax professional to make sure she hasn’t missed anything.
As briefly discussed above, a tax deduction is any expense defined by the IRS that qualifies to lower your net taxable income.
This can change from year to year, as the IRS laws may slightly change as the economy evolves and as new decision makers replace former executive leaders. You may have heard the phrase “ tax write off’s” many times. This is the same thing as a business tax deduction advantage, and both are used interchangeably.
Home office tax deductions are perhaps one of the biggest areas that will help you calculate your tax bill as a self-employed entrepreneur.
Some of the biggest expenses that qualify as home business tax deductions for self-employed are:
In other words, any of the above expenses can be used to deduct from your net business income, resulting in a lower taxable income. And a lower taxable income equals a lower tax bill.
One of the most common errors when filing income tax for self employed, is simply not reporting any income at all. Most solopreneurs who have a side business are only making a few hundred bucks extra per month, and do not depend on that income as their primary source of income.
Thus, the extra money made from their side business is minimal and ultimately never reported or only partially reported to the IRS.
What happens to those who fall into this trap? The IRS may impose a penalty that is equal to 20 percent of your underpayment. In other words, a penalty of 20 percent of the amount of income you did not report on your taxes may be applied.
For example, if you make extra income per month from your nutrition blog, and the total tax bill owed (after following the 4-step process above) is $1,000, the IRS may give you a penalty of $200 ($1,000 x 20% = $200). This is in excess of your tax bill for the unreported income.
This same penalty may apply even for only reporting part of your self-employed income.
If you file your taxes and only account for a portion of the income you made, the same scenario applies, and a 20% penalty may be issued.
Using the same scenario as above for an example, if the same self employed individual who makes extra money from their nutrition blog only reports half of their income made from the blog with a total tax bill of $500; (rather than $1,000 tax bill), a penalty of 20% of the underpayment of taxes may be applied.
This would be a penalty of $100 in this scenario ($500 x 20% = $100) in excess of the underpaid tax bill.
Did you know that one of the reasons a business fails is due to not planning for estimated tax payments? By following a few simple tips to stay on top of your tax bill, you will no doubt be among the elite entrepreneurs that are successful.
- Set a regular schedule to review and update your taxes. This should be a simple 10-minute checkup to categorize all your income and expenses.
- Keep all your receipts for larger purchases such as furniture, and computer equipment. A good rule of thumb is to keep a receipt for any expense that exceeds $10.
Don’t underestimate the small cost of hiring a professional tax advisor or investing in accounting software like Turbo Tax.
Wave, Quick Books, Fresh Books or Xero help you keep tabs on your books, making it easier when tax season rolls around. Although it’s an extra expense, the result maybe saving much more money on your tax bill than you paid for in tax advisor costs.
By continuously following these basic tips and tax principles for self employed individuals and work from home entrepreneurs, you will no doubt be among the few who properly plan for their taxes, resulting in a wildly successful business.
Always check with your accountant, this self employed tax guide does not replace professional experts’ knowledge.
Get more tips and ideas on how to file your taxes from this Preparing Your 2018 Tax Return.