5 Things Self-Employed People Know That Employees Don’t
Even though employees and the self-employed are on opposite sides of the employment spectrum, hey have a couple of common things. They all put their pants on one leg at a time, and they all pay taxes.
However, the amount they pay and how they go about it differs significantly. In this post, we’ll highlight five things that self-employed people experience when they pay taxes.
They pay taxes regardless of how much they earn
For some employed individuals, their tax amount depends on how much they earn. But then, self-employed entrepreneurs need to pay self-employment tax, regardless of how much they made or lost in the business. The threshold is at $400, which means if the business makes more than that, they owe the government.
This is in stark contrast to employed individuals who pay taxes according to their income. Employees who earn below the income tax threshold may not even pay any taxes.
There are a lot of extra forms
The term “a lot” is very relative. However, if you’re like most people who dislike filling out tax forms, any extra one is a lot. Self-employed individuals have to fill out self-employment tax forms, Schedule SE, Schedule C forms, among many others.
This is, of course, in addition to the forms everyone fills. You may already be thinking that being self-employed is unappealing. Don’t let the taxes deter you. Some resources make the process a lot easier, like this blog post on taxes for small businesses: small business taxes for dummies.
Each business has its forms
We’re not quite done with the forms. Self-employed individuals with multiple businesses have to fill out separate forms for each. It’s not just enough to track the transactions with advanced tax software and bookkeeping systems. Each business needs representation at the IRS.
The good news is that some of these forms can be consolidated. For example, tax calculations can be combined and filed in the Schedule SE. That’s some good news.
They get a lot of deductions
Being self-employed has a lot of perks, one of which includes tax deductions. Self-employed individuals get to write off home office expenses like utilities and repairs if their home space doubles as an office. This has some requirements, like the office space must be used as the principal place of business.
Self-employed individuals can also qualify for telecommunication deductions — phone, fax, Internet use, and health insurance deductions.
They may get away with not paying
Sometimes, individuals in an employed/self-employed situation may earn without paying self-employment tax. However, this is based on several factors and is only applicable to a small income portion. For example, if you work in IT and your neighbor offers to pay you for setting up a cryptocurrency mining farm.
According to the IRS, that money is subject to self-employment tax. But then, if you’ve never done a similar task on a self-employed basis, you may be in the clear. If the IRS decides to audit you, the odds are in your favor.