Q. What tax schedule must my client fill out if they are self-employed?
A. For nearly all self-employed persons, a Schedule SE, Self Employment Tax, must be filled out and attached to their federal income tax return. There are two types of Schedule SEs, the Short SE and the Long SE. Your client is usually better off with the latter, even if it is longer. The Schedule SE will help them calculate how much they owe in self-employment tax.
Q. Regarding taxes, what is the downside to being self-employed?
A. The downside would be that they are responsible for paying all of their own Social Security and Medicare taxes. Normally split 50-50 between employees and employers, if they are self-employed, they have to pay the full amount themselves, which is an extra 7.65%. If they have employees, they are also required to pay half of theirs as well. On the bright side, half of their self-employment tax can be reported as an adjustment on their Form 1040, which reduces their gross income by this amount.
Q. Can my client wait until the end of the year to start paying taxes since he/she just started their own business?
A. Self-employed people are required to pay the IRS taxes on a quarterly, not annual, basis. To assist them in paying self-employment tax, consult IRS Publication 505, Tax Withholding and Estimated Taxes, and Publication 533, Self-Employment Tax.
Q. What form should my client use to pay estimated tax?
A. To pay their estimated tax, they use IRS Form 1040-ES, Estimated Tax for Individuals. Estimated taxes are paid when no or not enough money is not withheld from income. This includes income from self-employment, unemployment compensation, alimony, interest and prizes.
Q. What special deductions should my client be entitled to as a self-employed person?
A. They are eligible to deduct a variety of business expenses, such as the cost of furniture, office supplies and telephone bills. If they have a home office, they may be qualified to take a home office deduction. Renters of offices may deduct rental payments.