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 Coronavirus Response and Relief Supplemental Appropriations Act of 2021, the second coronavirus relief package signed into law on December 27, 2020, please visit the “New Coronavirus Relief Package: What Does it Mean for You and a Second 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 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). Finally, you may have income collected from customers during the course of doing business that does not get reported on a 1099-NEC form. You must report all these sources of 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 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 each quarter.
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.
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. If your expenses were $5,000 or less, you can use Schedule C-EZ instead.
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 you 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 going forward into the new year.
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