When you are self employed, you are responsible to pay taxes towards social security, income and Medicare. Usually, these taxes are covered in part by an employer; however, if you are self-employed you are responsible to pay them yourself. You should set aside 30% of your income for self employment taxes.
What is the difference between gross and net income?
In order to determine if you need to pay taxes on your small business and what those taxes are, you have to understand the difference between gross and net income.
Gross income is the total amount of money you earned before taxes or other adjustments are considered.
Net income is calculated by subtracting your gross income from your expenses. This shows your profits or losses for the period.
How do I determine if I need to pay self employment taxes?
The IRS determined that you are subject to self employment taxes if you:
- Own a sole proprietorship
- Are an independent contractor
- Are a partner in a business
- A part of any other self-owned business
The next requirement is that you net $400 or more. This is where our gross vs. net income lesson comes in! If you lost money on your business (your net income is in negative) then you don’t owe taxes, but you should still report your loss to the IRS. If you had a net profit of $400 or more then you must pay self-employment taxes.
How do I file my self employment taxes?
In addition to paying income tax, small business owners also file an annual return and pay quarterly self employment taxes.
Self employment taxes are based on estimations. You determine your quarterly taxes based on your previous year’s earnings. The IRS provides worksheets to help you determine what you should pay each quarter.
If you overestimate or underestimate your earnings, the IRS has forms to help you refigure the next quarter’s taxes.
Quarterly Taxes for 2017 are due:
- 1st payment : April 18, 2017
- 2nd payment : June 15, 2017
- 3rd payment : Sept. 15, 2017
- 4th payment : Jan. 16, 2018
The IRS requires that you submit an annual return stating how much you paid in social security and Medicare taxes at the end of the year.