Frequently asked questions
1. What is self-employment tax, and how is it calculated?
- Answer: Self-employment tax is a combination of Social Security and Medicare taxes for self-employed individuals. It is calculated as 15.3% of your net earnings (12.4% for Social Security and 2.9% for Medicare). You may also be eligible to deduct half of the self-employment tax as an adjustment to your income.
2. Do I need to make quarterly estimated tax payments?
- Answer: Yes, if you expect to owe at least $1,000 in taxes after subtracting withholding and refundable credits, you should pay estimated taxes quarterly. This includes income tax and self-employment tax.
3. What expenses can I deduct as a self-employed individual?
- Answer: Common deductions include home office expenses, business supplies, internet and phone costs, vehicle expenses (mileage or actual expenses), professional services, travel, meals (50%), and health insurance premiums.
4. How do I qualify for the home office deduction?
- Answer: You must use a portion of your home exclusively and regularly as your primary place of business or for specific business activities, like meeting clients. The deduction can be based on actual expenses or the simplified method ($5 per square foot, up to 300 square feet).
5. What records should I keep for tax purposes?
- Answer: Keep receipts, invoices, bank and credit card statements, mileage logs, tax forms (1099-NEC, 1099-K, etc.), and proof of estimated tax payments. Maintain records for at least three years.
6. Do I need to issue 1099 forms to contractors I hire?
- Answer: Yes, if you pay an independent contractor $600 or more during the year for services, you must issue them a 1099-NEC form and file it with the IRS.
7. What is the Qualified Business Income (QBI) deduction?
- Answer: The QBI deduction allows eligible self-employed individuals to deduct up to 20% of their qualified business income, subject to income limits and specific rules.
8. Can I deduct startup costs?
- Answer: Yes, you can deduct up to $5,000 in startup costs and $5,000 in organizational expenses in the first year of business. Any remaining costs must be amortized over 15 years.
9. What happens if I can’t pay my taxes on time?
- Answer: If you can't pay your taxes on time, file your return by the deadline to avoid failure-to-file penalties. You can set up a payment plan with the IRS or explore options like an offer in compromise if you owe more than you can pay.
10. How do I handle taxes if I have multiple streams of income?
- Answer: Report all income sources on your Schedule C for self-employment. Ensure you account for each income stream separately and deduct expenses related to each activity.