So, you’ve decided to break away from the 9 to 5 life and start your own business. Going out on your own can bring many advantages, but it may invoke panic when it’s time to file your self-employed tax returns.
Gordon Law has helped taxpayers like you stay compliant and save millions on taxes and penalties since 2012. In this guide, we’ll explain what you need to know about filing your self-employed tax returns, from deadlines to deductions.
There’s a lot to cover, and these taxes can be confusing, so don’t hesitate to reach out if you need more help!
Key Takeaways
- The majority of self-employed individuals have pass-through income.
- Your tax filing requirements and deadlines depend on your business structure.
- Self-employed individuals are subject to self-employment tax as well as income tax.
- You may be required to pay estimated taxes on a quarterly basis.
- Self-employed individuals can deduct business expenses from taxable income.
Understanding the Basics of Self-Employed Tax Filing
Pass-Through Taxation
Unless your business is a C-corporation, you are likely subject to pass-through taxation. This means your business income, expenses, and deductions pass through to your individual tax return.
For sole proprietorships and single-member LLCs, this also means your business does not have to file its own tax return separate from your personal tax return.
Hobby vs. Business Income
In some cases, your business may actually be considered a hobby by IRS standards. In this case, you can’t deduct any expenses, but you also don’t have to pay self-employment tax. Learn more about hobby vs. business income here.
Bookkeeping is Essential
Many business owners scramble to track down invoices and receipts in the weeks leading up to the tax deadline. But with proper bookkeeping throughout the year, your tax filing will be significantly easier. This also helps you stay on top of expenses and maintain your company’s financial health.
Our sister company, Gordon Tax, provides comprehensive, year-round bookkeeping and accounting.
Self-Employment Tax
Self-employment tax, also known as the SECA tax (Self-Employment Contributions Tax), is a mandatory payment that self-employed individuals make to fund their Social Security and Medicare.
The IRS requires you to file self-employed tax returns if either of the following applies:
- Your net earnings from self-employment are more than $400
- You received more than $108.28 as a church employee
W-2 employees split Social Security taxes and Medicare taxes with their employer and have their share automatically deducted from their paychecks. But if you’re self-employed, you are responsible for paying the total SECA tax, which is currently 15.3%, in addition to income tax. This includes Social Security taxes (12.4%) and Medicare taxes (2.9%).
Self-employed individuals, such as freelancers, independent contractors, and sole proprietors, often pay more taxes at the end of the year than W-2 employees.
On the bright side, self-employed individuals can deduct up to 50% of their self-employment tax from their taxable income.
Self-Employed Tax Return Due Dates
Generally, your 1040 (individual tax return) is still due on April 15 of each year, unless you file an extension. In some cases, your business may need to file its own tax returns, as well.
- LLC Taxed as a Sole Proprietorship: Not required to file additional tax returns.
- LLC Taxed as a Partnership: Must file Form 1065 by March 15.*
- S-corp: Must file 1120-S by March 15.*
- C-corps: Must file Form 1120 by April 15.*
- C-corps Using a Fiscal year: Must file Form 1120 the 15th day of the 4th month after the fiscal year-end.
*These are the deadlines if your business uses a calendar year. If your business uses a fiscal year instead, your filing deadlines will be different. If you’re not sure about your business structure and tax filing deadlines, reach out to our team for help.
Quarterly Tax Payment Deadlines
In addition, you will likely need to pay quarterly tax estimates to avoid IRS penalties. If your business uses a calendar year, the due dates for quarterly payments are:
- April 15
- June 15
- September 15
- January 15
Self-Employed Tax Forms
Understanding the key tax forms for your business is essential for compliance and avoiding penalties. Here’s an overview of the forms you should be aware of as a business owner.
For Sole Proprietors and Single-Member LLCs
- Form 1040 (Individual Income Tax Return): Sole proprietors and single-member LLCs report business income and expenses on their personal tax return using Form 1040.
- Schedule C (Profit or Loss from Business): Sole proprietors and single-member LLCs use Schedule C to report their business income and expenses. This form is attached to your Form 1040 and is used to calculate your net profit or loss from the business, which is then carried over to your personal tax return.
- Schedule SE (Self-Employment Tax): Used to calculate Social Security and Medicare taxes owed on net business income.
For Partnerships, Multi-Member LLCs, and S-corps
- Form 1065 (U.S. Return of Partnership Income): Partnerships and multi-member LLCs file this form to report their business income and deductions.
- Form 1120-S (U.S. Income Tax Return for an S-corporation): S-corporations file Form 1120-S to report business income, deductions, and credits.
- Schedule K-1 (Partner’s Share of Income, Deductions, and Credits): Each partner or member receives a Schedule K-1, which reports their share of the business income. This information is used to complete their personal tax return.
For C-corporations
- Form 1120 (U.S. Corporation Income Tax Return): C-corporations file Form 1120 to report taxable income and calculate corporate taxes.
- Form 1099-DIV (Dividends and Distributions): Shareholders of C-corporations receive Form 1099-DIV if they are paid dividends during the tax year.
- Form W-2 (Wage and Tax Statement): If an owner also works for the C-corporation, they would receive a W-2 for wages and report that income separately from dividend income.
For Employers and Contractors
- Form W-2 (Wage and Tax Statement): If you have employees, you must issue Form W-2 by January 31, summarizing their wages and tax withholdings for the year.
- Form 1099-NEC (Nonemployee Compensation): Businesses must issue Form 1099-NEC to independent contractors paid $600 or more during the tax year.
- Form 941 (Employer’s Quarterly Federal Tax Return): Employers file this form quarterly to report wages, Social Security, and Medicare taxes withheld from employees.
- Form 940 (Employer’s Annual Federal Unemployment Tax Return): Filed annually to report and pay unemployment taxes.
Other Important Forms
- Form 1099-MISC: Used to report miscellaneous payments, such as rent or prizes, not covered by Form 1099-NEC.
- Form 720 (Quarterly Federal Excise Tax Return): Certain industries, like transportation or communications, may need to file this to report excise taxes.
- State-Specific Forms: Depending on your state, you may need to file additional forms for sales taxes, state income taxes, or franchise taxes.
Self-Employment Tax Deductions
Self-employed individuals can offset their taxable income through deductions. Here are some of the most common ones.
Qualified Business Income (QBI) Deduction
The Qualified Business Income (QBI) deduction is a tax break available to business owners and self-employed individuals.
The QBI deduction allows eligible taxpayers to deduct up to 20% of their qualified business income. QBI is the net income from a trade or business earned through a pass-through entity. Part of the Tax Cuts and Jobs Act of 2017, the QBI deduction is specifically designed for businesses that are taxed as pass-through entities, such as:
- S-corps
- LLCs
- Partnerships
- Sole proprietorships
However, certain types of income, such as capital gains or losses, dividends, and interest income, do not qualify for this deduction.
The deduction amount depends on a few factors, such as the business owner’s taxable income and the type of business.
It’s important to note that this is a complex tax provision, and it’s best to consult with a tax professional to understand how it applies to your business.
Home Office Tax Deductions
If you use any part of your home for your business, the IRS allows self-employed individuals to take advantage of the home office tax deduction. This allows you to write off a portion of your rent, utility bills, and home maintenance.
To qualify for the home office tax deduction, self-employed individuals must meet two basic requirements:
- Regular and exclusive use
- Principal place of business
To qualify under the regular use test, the IRS requires you to use a specific area of your primary residence consistently for your business. “Exclusive use” means you only use the home office for business purposes.
The rules for claiming home tax deductions can be complex and may vary depending on your circumstances. It’s always a good idea to consult with a tax lawyer to see if you qualify to claim these deductions.
Business Expense Deductions
The deductions continue beyond your home office if you’re self-employed. Any “ordinary and necessary” business expenses can be deducted from your taxable income, such as:
- Office supplies
- Software used in your business
- Professional memberships
- Advertising costs
- Professional services, including legal and accounting services
- Cell phone
- WiFi
- Auto expenses
- Continuing education
- Business meals
- Business travel
Some of these deductions, such as auto expenses and business meals, have specific requirements.
How to File Self-Employed Tax Returns
Filing self-employed tax returns can be overwhelming if you’re new to the process. Which forms do you need to complete? Do you have all the necessary documents? But don’t worry; we’re here to help!
Here’s how to file self-employment taxes step by step:
- Determine if you are required to file self-employed tax returns: If you’re self-employed and earn more than $400 a year, you must file a self-employed tax return.
- Gather income and expense documents: Gather records of your income and expenses to determine your net earnings. These records include invoices, receipts, and bank statements. Be sure to save these records for at least 3 years.
- Calculate your net earnings from self-employment: To calculate net earnings from self-employment, subtract your business expenses from your income. This amount is your net earnings and is subject to self-employment tax.
- Determine which tax forms you need to file: Many self-employed individuals have pass-through income, which means that your business income flows through to your individual tax return. The most common tax forms required are Form 1040 (the standard tax return), Schedule C, and Schedule SE.
- Make estimated tax payments: If you expect to owe more than $1,000 in taxes, you may be required to make estimated tax payments throughout the year to avoid underpayment penalties.
Maintaining accurate records and filing taxes promptly can help you avoid IRS penalties or interest.
Don’t let the paperwork and frustration get you down—let us handle it. Get in touch today to learn more about how we can help with your self-employment tax filing needs.
File Your Self-Employed Tax Returns with Confidence
Self-employed tax returns can be complicated. Most business owners simply don’t have the time to deal with taxes on their own, and prefer to hire a professional. Not only does this help you file on time without any headaches, but it ensures your tax returns are complete and correct, helping you avoid tax penalties that could throw a wrench in your business operations.
Gordon Law has helped hundreds of business owners stay compliant and maximize their tax returns. With comprehensive accounting, tax planning, and tax preparation services, you can count on our team to make your self-employed taxes a breeze!
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