Have you been self-employed less than a year? If you’re just starting out, it’s possible you worked at a job earlier in the tax year before making the switch to self-employment, or you’re working multiple jobs. In this case, you may have more than one source of income you’ll need to report on your income tax return.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
Receiving W-2 and 1099 Tax Forms
If you were employed for part of the year, your employer will likely report your employee income to you and the Internal Revenue Service (IRS) on Form W-2. In addition, you may also receive self-employment income that your customers reported to the IRS on a 1099-NEC form (1099-MISC in prior years). And, you may have income collected from customers that does not get reported on a 1099-NEC form. If you receive payments through online payment services such as PayPal, you might receive a 1099-K. Payers will also send these forms to the IRS to report your income so it is important to include all of your income on your tax return.
The American Rescue Plan Act of 2021 significantly reduced the reporting threshold associated with Form 1099-K for card payment processors, and third-party payment networks like Venmo and Cash App from $20,000 to $600. Beginning with tax year 2022, if someone receives payment for goods and/or services through a third-party payment network, their payments are required to be reported on Form 1099-K if more than $600 was processed during the year. This change impacts small and large businesses including those who are self-employed or have side-gig income, real estate rental income, sales of items (online garage sales, re-selling of tickets) or hobby income.
When you work for someone else, you pay half your Medicare and Social Security taxes, and your employer pays the other half. These are sometimes referred to as payroll taxes.
When you’re self-employed, you are responsible for paying all the payroll tax yourself - both the employee and employer portions - on the net income earned from your business. This is the self-employment tax. You can calculate it on IRS Schedule SE and include the form with your tax return.
The good news is, your employer has already withheld payroll taxes for the income reported on your W-2 form. However, you’ll have to pay the self-employment tax yourself on your self-employed income.
Paying Quarterly Estimated Taxes
You shouldn’t wait until the end of the year to pay your self-employment tax and income tax on your business income, or else you might owe interest and penalties. The IRS wants you to estimate your taxes and pay as you go, four times a year. You can complete IRS Form 1040-ES to estimate how much you’ll owe for each quarter of the year.
When you first start your business or work as self-employed, you’ll have to make an educated guess about how much income you will earn over the tax year, because you won’t have any previous years’ income to guide you. If your estimate is wrong—either too low or too high—you can adjust the amount on your 1040-ES forms during the tax year.
The important thing is that you begin making quarterly payments as soon as you begin making money as a self-employed person. They’re due on April 15, June 15, September 15 of the current year and January 15 of the following year or the next business day if the due date falls on a weekend or holiday.
Completing IRS Schedule C
Schedule C is used to calculate your business income for the portion of the year that you were self-employed—all the income your business took in, less business expenses. The resulting number is what you’ll use to calculate your self-employment tax on Schedule SE and what you’ll report on your Form 1040 as income.
Reporting All Income
You must report all your sources of income to the IRS on your tax return, even if you don’t receive a 1099 form from your customers. If you were close in estimating what you would owe when you completed Form 1040-ES and made those quarterly payments on time, you shouldn't owe the IRS much (if any) additional tax.
Always go back over your tax return to make sure that you have included all of your income and deducted every business expense you were entitled to. Look for differences between your estimated expenses at the time you completed Form 1040-ES and what they actually turned out to be. If you were wrong in your forecast for either income or expenses, you can adjust your estimated tax payments going forward into the new year.
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