Taxes are a way of life and if you own a small business or operate as an independent contractor, the government still wants your money. Specifically, they want to tax the profit that you have seen from your business. But not to worry, at least, not yet. The full amount of taxable income is determined by more than just the total profit earned.
A self-employed designation is determined by the IRS. For tax purposes, anyone who is the sole owner of their trade or business, an independent contractor (this includes freelancers), or a member of a partnership in a small business are classified as self-employed. As such, there are additional tax forms that need to be filed each year that the business is in operation.
A self-employed person who makes $400 or more in profit during the year, has to declare that income to access taxes. This also applies to church employees who earn more than $108 and didn’t receive a W-2 reporting form. The IRS forms will determine what taxes, if any, need to be paid.
All self-employed persons must file a Schedule SE form in addition to the 1040 form. The Schedule SE form has a long and a short version. The form has instructions concerning who needs to fill it out. This form records the total earnings of the business or trade enterprise, the amount of tax according to IRS calculations, and the tax amount after a fifty percent deduction is applied.
This amount may not be the final tax owed on the profit of the business. There is another form where people list the profit or loss from their business enterprise. This form is called a Schedule C. Any portion of the profit that was funneled back into the business to fund expenses is recorded here on specific lines.
The total profit received into the business is reported here, just like it was recorded on the Schedule SE. Freelancers and independent contractors may have a business account where they record each payment transaction to determine this amount. Anyone who has an ongoing contract with you for services will be subject to sending you a 1099 form. This form details the amount of money paid to you for work done in the tax year.
Home based businesses can use this form to record any expenses for the business use of the home. This amount is transferred from another form, Form 8829, where the amount of the home deduction is determined. Information about the use of your vehicle for business use is recorded on the Schedule C form. Businesses that deal in inventory for their products have room in Part III to list that information and the dollar amounts.
The Schedule C form is useful in determining the amount of taxes that you will pay. A tax professional will be able to tell you all of the deductions that you are qualified to take against your profits to lower the amount of taxable income. Exemptions are even better because they lower the amount of taxes to be paid.
Most tax software programs also help you fill out your Schedule C and other necessary forms easily. Whether you do the forms yourself, use a software program or hire a tax professional, be sure to file accurate and honest tax returns. Operating a business is hard enough with out being subjected to an IRS Audit!
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