Today we’re talking with Katie Marcum from KatieMarcum.com! She’s a tax expert and friend of mine who has gladly agreed to walk us through the basics of taxes for self-employed people. I don’t know about you, but even with a background in banking, taxes confuse the crap out of me. And well, this time of year I tend to realize that I’m not nearly as prepared for them as I should be. Thank goodness for her guidance!
Thanks to the advancement of technology, the number of proprietors in the United States has skyrocketed. See the stats here.
Self employed individuals, unless you have established a corporation, are required to file a Schedule C as part of their income tax return each year. As a tax preparer I meet numerous people each year that are required to file a Schedule C and don’t realize it.
Here’s how to know if you might be required to file a Schedule C:
- You are working regularly for cash or barter “under the table” with the intention of making a profit (if you do not have the intent to turn a profit, your income is still taxable, but it is classified as hobby income)
- You work as ‘contract labor’ for a company or individual
- You are a statutory employee
- You work for yourself with the intention of making a profit
If you are unsure whether you are required to file a Schedule C, consult your tax advisor.
After you’ve determined that you are indeed required to file a Schedule C, the next question may be “do I need to apply for an EIN?” An EIN is a tax number assigned to businesses (similar to a Social Security Number being assigned to individuals). Not every business is required to have an EIN. Here is an easy checklist from the IRS to determine whether or not you need an EIN.
The Schedule C is set up quite simply:
Income – expenses = profit/loss
ALL business income needs to be reported. Whether you received the income as cash and turned around and bought more supplies with it, or you deposited it in the bank account, its all treated the same way. Calculating your income is simple, add up every dollar you collected and put it on the form. Don’t add anything to it, don’t subtract anything from it, that will come later.
Did you know that you are required to deduct expenses if you have them? That may sound like a silly rule but since your net profit/loss affects your entire tax return (including how much earned income credit you qualify for and how much self employment tax you pay) it is just as illegal to under report your expenses as it is to over report your expenses. In PART 2 we’ll go into a little bit more detail about what types of expenses you can deduct.
Income – expenses = net profit/loss remember? If you have a net profit, it gets added to all of the other income on the tax return. In the same way, if you have a loss, the loss lowers all of your income subject to tax.
If you have a profit, you will not only pay income tax on your income, but you will also pay self employment tax (15.3%). The self employment tax pays your share of your social security and medicare tax.
Do you still have questions?
Sign up HERE for the live webinar that will be held on Tuesday January 14th, 2014 at 8:30 pm central. I’ll be available for questions.