If you are self-employed, you will have to attach a Schedule C to your 1040 form. You will also need to compute your self-employment tax on a 1040 Schedule SE. You have to pay this tax if you work for yourself and your net earnings are $400 or more.
Net earnings include profit from a farm or non-farm business. If you own more than one business, your self-employment tax is based upon the net earnings from combining all of your business profits. The benefit of owning more than one business when filing this tax is that a loss from one business reduces the income from another. It is the full share of Medicare and Social Security taxes against your income. Employees who work for other people only pay half of these taxes, as the people who employ them pay the other half. A self-employed individual is liable for the entire amount.
The Farm Optional and Non-Farm Optional Methods may be used as options for computing your self-employment tax liability. Using these methods might qualify you to claim a Child Credit or a larger Earned Income Credit. They might also increase your self-employment tax liability.
The maximum of earnings that you are required to pay this tax against is $87,000. You can also deduct half of it when calculating your income tax. If you are a member of the clergy, you can request the Internal Revenue Service exempt you from self-employment tax.
If you expect to owe more than $1000 in taxes, you are required to make quarterly estimated tax payments. Otherwise, your self-employment tax is not due until year’s end. This is because most self-employed businesspeople do not file their profit or loss figures until the end of the year. If there is a loss, the self-employed individual gets a tax credit of half of the self-employment tax due.
When you are self-employed, you are in business. You are, therefore, entitled to all the legitimate business deductions that greatly lower your tax liability. As a businessperson, your best course of action would be to consult with an attorney or financial planner before making any decisions regarding how to compute your self-employment taxes and before filing your income tax return. They are professionals when it comes to self-employment taxes and business deductions. You should seek their advice on how to best reduce your tax liabilities for your particular circumstances.
Are you doing your own business? Then you have to pay self-employment taxes. If you’re not aware of the tax planning strategies, you may end up paying huge amounts. Get educated and saving thousands! Chintamani Abhyankar explains.
Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous Tax eBook “Stop donating your money to IRS” which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.
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