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It is always a good idea to learn everything about something you wish to delve into deeply before taking the first plunge. For example, learn all there is to know about self-employment before you start working as one. You need to be ready with a solid business plan and start-up capital. As part of the lessons, you will have to look into the issue of self-employment tax. The lessons will involve learning how to fill the relevant self-employed tax form. It is good to learn these lessons as they could help to keep your entity in operation during its infancy. 

Before delving deeper into the tax form, determine the kind of business you wish to run. 

Mostly, your choices will be restricted to the following: 

  1. Sole proprietorship
  2. LLC
  3. S Corporation
  4. C Corporation
  5. Partnership

Sole proprietors should always report the incomes and expenses on Schedule C. What is more; they are responsible for paying all the self-employment taxes, which include Medicare and Social Security. In partnerships and corporations, the self-employed individuals have to file as either corporations or partnerships. The law requires partnerships to file information returns. In partnerships, federal income taxes do not apply. However, federal taxes apply in C-Corporations. In addition, special tax deductions apply in C-Corporations. 

Image source: credibly.com

LLCs exist as legal business structures. However, where they differ from the other structures is the lack of recognition for the purpose of paying federal taxes. Instead, the law expects all LLCs to file taxes as sole proprietorships, partnerships, or corporations. A person running an S-Corporation is allowed to file taxes just like in a partnership. In this case, you will file your income together with your personal tax returns. Take cognizant of what the law says about the kind of self-employment venture you run for tax purposes. 

Preparing for Taxes

Now that you know all that, the next stage is to prepare for the self-employed taxes. 

Preparation is key to ensuring that you fill the self-employed tax forms correctly. 

If it’s your first time to work in self-employment, you should begin by getting a tax ID number. The number is free to get. You pay nothing and no one to acquire and use your tax ID number. The tax ID number for your business should be different from what you already have and use personally. Give this number to all customers who need a W-9 form from you. What is more, it is important to point out the fact that the tax ID number is essential for a self-employed individual who has employed workers. 

Home Office Tax Deductions

As a self-employed individual, you may deem it necessary to work from home. Such a decision could open you up to a few tax deductions. The big one here is the home office tax deduction. You only qualify for this deduction if you have set aside a room or some space in your house specifically for business-related stuff. You have to prove that the room (even if it’s your garage) serves solely as the home office. However, those without rooms or garages can set aside a corner of the house for this purpose. Make sure you put a desk and a chair in that corner. 

Always claim this home office deduction. It will put more money in your pockets. 

You qualify for this deduction only if you use the space exclusively and regularly for business. 

‍Image source: wikihow.com

Gather Documents and Statements

Next, you have to gather all statements and documents showing how much you earned as income the past year. Obviously, you will not need these documents if you are just starting and your business has not run a single day yet. However, this requirement is for all people who have already established and have been running their businesses for a while. The self-employed individuals are required to gather all 1099s. Clients with whom the self-employed people have running contracts have until January 31 to send the 1099 forms. 

Contact the clients if you have not received the forms by February 1. 

Ask for those forms. The forms help you when reporting or filing your tax returns. They help the IRS to check if everything is in order. You do not want a situation where you forget or fail to report an income for which IRS already has information. IRS might conclude that you were trying to evade your tax obligations and punish you with heavy penalties. Some folks still earn a salary despite working in self-employment. Such individuals should ensure they receive their W-2 by February 1 too

It is a bit difficult to fill the appropriate self-employed tax form when lacking the relevant receipts and invoices. Without the relevant documents, you may find it hard to claim the tax deductions due to you. Therefore, organize all these documents in readiness for filing your tax returns. Invoices, receipts, and any other document help provide the IRS with the proof it needs that you actually paid money to acquire a service or product your business needed to operate. The withhold expenses you are eligible for include: 

  • Health insurance premiums
  • Costs of home office maintenance
  • Travel, gas and other expenses your business incurred while entertaining or hosting clients
  • Business-related supplies such as pens, computer, and printing paper

Did You Make Enough to File and Pay Taxes?

How much money did you make the past year? The answer you issue to this question is important for your tax returns. The answer will indicate whether you made enough money to file tax returns. Many times, independent contractors fail to make the kind of money that justifies them filing returns. According to the IRS, independent contractors should file tax returns only if they made money in excess of $400 for the previous year. It is easy to determine if you made this money. Simply subtract expenses from income. 

The law requires you to pay self-employment tax as long as you earn income. 

Not only that, but the law also expects you to file your tax returns if you earn income. 

Filling the Form

Now, the focus turns to the actual self-employed tax form. 

Self-employed folks have to understand the different types of self-employed tax forms they should sign. It is good to know the right kinds of forms to use. No two forms serve the same purpose. The forms you use should be different from the ones the employed people use. The Schedule C is the most important self-employed tax form to use. It comes in two variations, which you should seek to know too. The two variations exist for a purpose. The two variations are: 

  1. Schedule C-EZ
  2. Schedule C-SE

Check the IRS website to know whether you should file Schedule C-EZ or Schedule C-SE

The self-employment tax rate currently stands at 15.3 percent. The tax rate comprises two components. The first component, which covers Social Security, is 12.4%. The second component, which caters for Medicare or hospital insurance, is 2.9%. Social Security is mandatory tax since it caters for your needs in old age or in case you suffer a disability of any kind. Therefore, self-employed folks have to budget for these two taxes in addition to many others by filling the relevant forms. 

File the Forms

Once you fill the appropriate self-employed tax form, your next task involves filing and submitting it with the relevant authorities. Ensure that every detail you fill or enter on the forms is as accurate as possible. Inaccuracy occurs whenever you attempt to do this without the necessary 1099s. With the 1099 forms in hand, you can report the accurate income you earned the past year. Up to this point, you have done nothing but reporting the taxable amount. You have only informed IRS that you have pending tax to clear. 

Pay Taxes

Next up is the actual payment. 

You can only pay what appears on the self-employed tax form you filled. Always make a note of the amount you owe IRS. At this point, you are free to decide how you wish to pay the taxes. The law offers you two options here. In the first option, you can decide to pay on a quarterly basis. Under this option, you can spread the payment into four portions paid in installments until you fully pay what you owe. In the second option, you can opt to pay the whole amount at once, preferably at the end of the year. 

The dates you need to memorize in case you go with the first option are: 

  • April 15
  • June 15
  • September 15
  • January 15

You cannot pay on any other date apart from these ones. 

Therefore, plan accordingly, so you do not default thereby attracting the anger of IRS. 

Anybody who chooses to pay the entire amount all at once can only do so by April 15. 

What to do if you default

Obviously, you may default due to faults that are not of your own making. If you find yourself in a situation where you cannot pay the taxes by the due date, you should not go silent. Instead, communicate with IRS to find assistance. The IRS will not waive your tax bill. It will agree with you on new dates by which you should pay what you owe. Failure to pay your taxes could land you in serious trouble, even if you already reported or filed the amount you owe on your self-employed tax form. Some of the consequences of your actions include: 

  1. Paying heavy penalties
  2. Paying interest
  3. Getting various notices and warnings from IRS
  4. Forfeiting any refund, you are entitled to
  5. Giving up Social Security
  6. Receiving federal tax lien
  7. Losing control over your credit report
  8. Seizure of property
  9. Facing bankruptcy
  10. Receiving summons
  11. Serving jail time
  12. Spending or wasting several years dealing with IRS

Getting in touch with IRS immediately you notice a potential inability to file or pay on time is the best solution for you. The agency is likely to treat you more kindly than if you opted to keep off without informing it of your predicament. In some cases, the IRS could even take the step of reducing the amount of tax you owe. It is worth mentioning that your options – in terms of the favors you could get from IRS – reduce further the longer you wait before engaging with the agency. 

The IRS has several solutions to people who are unable to pay their taxes on time

Only a certain percentage – 92.35% – of your income is subject to self-employment tax. 

That percentage applies only where your net earnings over the year are concerned. 

Every self-employed tax form you need is available on the IRS website. Visit the website to generate the necessary forms you need for filing tax returns. For example, form 1040-ES will help you with your estimated quarterly tax payments. The agency’s official website contains many other types of forms. Go through them to see what they all stand for. Choose what you need. Check with other self-employed folks who are in the same industry with you to learn more about these forms and their uses. 

Health insurance tax deductions are also worth understanding. Take your time to learn what these deductions entail before you begin filling any self-employed tax form. Where these deductions are concerned, the focus will mostly be on your net taxable earnings. What this means is that you can only deduct these deductions from your net taxable income. Additionally, you can only do this while filing your tax returns for the year just ended. Check the instructions on Form 1040 to learn more about the deductions you are entitled to. 

Hire Tax Return Preparers

Unfortunately, the self-employment taxes can be quite confusing. The confusion could lead you into filling the wrong self-employed tax form. You can avoid this by hiring or working closely with a person whose expertise is in preparing tax returns. Ask this individual to help you fill the appropriate form with accurate information. Several tax return preparers are willing to help. You only have to find the right one. With the right preparer by your side, you will have no difficulty deducting all the eligible deductibles from the tax returns or pay the required taxes. 

With this information, you can now proceed to fill self-employed tax form today.

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