For the startup entrepreneurs and self-employed individuals, it is easier to forget about the taxes. Unlike the W2 employees, their taxes aren’t deducted from their paycheck because they are giving those checks to themselves. Besides, for the self-employed taxpayers, the amount is higher.
So it’s no wonder why taxes are a matter of frustration to them. However, their frustration doesn’t free them from the obligation to pay their taxes. I can’t help with that. But what I can do is help you by introducing the basics of taxes for a self-employed person or startup entrepreneurs.
Tax Obligations for Self-employment
Freelancer or Self-employed entrepreneurs must consider their taxes when setting their rates, consider their tax burden by arranging their accounts for the year (e.g., sparing cash versus re-investing on the business strategy, and track their business-related expense to deduct them towards the end of a year.
As per the rules and classification by the Internal Revenue System (IRS), Self-employed and entrepreneurs are considered as:
- Carrying on the business or trade as the sole-proprietor or a self-employed contractor.
- Being the individual from an association that carries on a business or trade.
- Being in the business for yourself (Which includes part-time businesses).
As indicated by Pew Research, about 15 million Americans are independently employed. When you are independently employed, you need to pay the SE tax or Self-Employment Tax and also the income tax. This SE tax is a Social Security & Medicare tax,which is generally for people who work for themselves.
Before you decide the tax obligations, you should make sense of your net loss or net profit from your business or company. You can compute this by subtracting the costs of your business from your business profit. In the event that your costs are not as much as your pay, the distinction is the net benefit and turns out to be a piece of your income. Be that as it may, if your costs are more than your profit or income, the distinction is the net loss.
Filling the Taxes
Quarterly Payments:On the off chance that you hope to make quarterly estimated tax installments, utilize Form 1040-ES, the Estimated Tax for all Individuals working for themselves, which contains a worksheet that is like Form 1040. Make certain to monitor your return starting with 1 year, then onto the next, as you will require your earlier year’s yearly tax returns to round out Form 1040-ES.
The IRS enables you to round out Form 1040 – ES that contains clear vouchers for you to utilize when you mail your approximate tax payments, or you just make your payments by using the EFTPS or Electronic Federal Tax Payment System.However, if this is the very first year of self-employment, you should assume the amount of profit or income that you hope to acquire for the year.
To record your yearly tax return, you should report your loss or profit/income from a business you worked or a calling the shots as a sole proprietor. To file your Social Security & Medicare taxes, you should record Schedule Self-Employment Tax (Form 1040).
Now use the loss or income ascertained on Schedule C or Schedule C-EZ to compute the amount of total Social Security & Medicare taxes you need to pay during the year.
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