After thinking about getting new clients, expanding your customer base as a consultant, how to file your tax is another issue you must face. But it doesn’t have to be so, a good knowledge of self-employment income tax would save you the worry. In business, if you want to avoid an audit by the IRS, you must do the right thing all the time. Unlike full-time employees, self-employed individuals don't have taxes deducted automatically from their income; they deduct it themselves.
This calls for diligence in the area of knowing what comes in and what goes out in the form of income and expenses. Asides the benefit of having your time to yourself, getting high income, and the flexibility with which you work, you are obligated to file your Self-employment income tax else you have the IRS knocking at your door anytime soon.
Asides the fact that forms used for filing taxes can be confusing, the ropes of taxation is truly complicated, especially if it's your first time and you are not good with numbers. As a freelancer, you must take taxes into account when submitting proposals to clients, since your income would be taxed.
If you have a target to meet for your income, always know that it is after-tax has been deducted. If you plan to save money or reinvest it in the business, do so after filing for your self-employment income tax. According to the IRS, you are self-employed if you are:
As a self-employed individual, you pay both self-employment tax (Medicare and Social Security) and income tax.
Annual return - to file for this, you must report your income or loss from a business you were involved in, whether as a sole proprietor, a partner, consultant, or a freelancer. To report your Medicare and Social Security taxes, you make use of the Form 1040 Schedule SE. It is the income or loss you got on your Schedule C EZ or Schedule C that determines your Medicare and Social Security taxes. There are instructions on the Schedule SE form to always guide you in filling the form(s).
Quarterly payment - if you think the quarterly return is best for you, then you must use the Form 1040-ES (Estimated Tax for individuals). This form contains a worksheet like that of Form 1040. You will need to keep your prior year's return because it will be needed to fill the Form 1040 ES. Your estimated tax payments can be mailed using the blank vouchers included with Form 1040-ES, or you pay online through the EFTPS –'Electronic Federal Tax Payment System'. If it's your first time as a freelancer, then you will need to submit an amount you expect to earn as an income for the year.
Generally, these two help you to save money, but they are different. Tax credits decrease the amount of Self-employment income tax you owe directly while tax deductions lower the overall tax bracket. Tax deductions lower the taxable income; this makes your taxes also decrease because of your tax bracket decreases.
They do not lower your actual taxes, unlike tax credits. Tax credits (refundable or non-refundable) impact your actual taxes. Refundable tax credits allow you to lower your Self-employment income tax to zero and still pays you if there's any balance remaining, while non-refundable does not pay you the balance. It just reduces your tax liability to zero.