People that are self-employed typically pay a self-employment tax, income tax, and are required to file quarterly. Estimated taxes are similar to the Medicare and Social Security taxes that are withheld from a person’s paycheck. The goal for the self-employed is to subtract business expenses from business income to determine estimated taxes.
If expenses are less than income, the difference becomes net profit and part of the income. The reverse is also true. If expenses are more than income, the difference is the net loss. Net earnings of more than $400 requires the filing of self-employment taxes and the individual may also have to file an income tax return.
Since there’s no employer taking Medicare and Social Security taxes from a paycheck, those that are self-employed have to estimate their tax liability. Specialized forms and worksheets will be required and it’s at this point that most individuals hire a tax professional. They will know when the client needs to file and they have the advanced software needed for the complex computations. They can also e-file.
When an individual launches a business, they must decide what type of business structure the enterprise will follow to ensure they’re estimating the correct level of taxation. People most commonly establish a sole proprietorship, corporation, partnership or S corporation. They may also choose to operate as a limited liability company (LLC), which is a relatively new type of entity that most states deemed allowable in the 1990s.
When spouses form a business venture, it’s considered a joint venture for tax purposes and the rules are slightly different. They have the option, if they’re the only employees, to elect to file taxes individually rather than as a partnership.
Business owners will find that they’re charged a penalty if they don’t pay enough taxes through estimated tax payments if they receive other income. Those sources can include alimony, dividends and capital gains, and prizes and awards. It’s just one of the reasons why it’s easier and more efficient to hire a tax professional.
At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs. We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!