Common Questions Concerning Taxes For the Self-Employed

Get The Simple Facts on These Common Self-Employment Tax Questions

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Taxes for self-employed individuals are complex. Questions concerning deductions and proper procedure are common particularly during the first few years of filing a Schedule C. Here are answers to common tax questions often posed by the self-employed.

What Is Self-employment Tax? Is it in Addition to the Regular Taxes I Typically Pay at the End of the Year?

Self-employment tax is a separate tax. It is a tax on top of any other taxes you may owe. Self-employment taxes are payable according to the Self-Employment Contributions Act (SECA). It is the self-employed individual’s own version of FICA tax, which is typically paid by employers and employees for Social Security and Medicare. It is due on your net earnings from self-employment.

Many of the newly self-employed – sole proprietors, independent contractors – are surprised at their tax bills at the end of the year because they seem to be paying a lot more in taxes. This is because they are required to pay both the employer and employee portion of Social Security and Medicare, which is 15.3 percent in total.

I am Self-employed. Must I Hire an accountant?

Not necessarily. It is up to you to decide whether or not to seek outside help and counsel as you prepare your personal and business taxes. If you have little experience preparing your business taxes or are in your first year as a home business owner, it may be a wise investment to seek expert help, at least for the first year or two. It is important to note that you can deduct the expense incurred to prepare your business taxes (that is, the cost of hiring a tax accountant).

Another option, however, is to use Intuit’s software tool, TurboTax. The software offers a wizard to walk you through both personal and home business tax documents in a straightforward way. Be advised, however, that tax filing software can only help you execute what you think you should do. If you are not sure about deductions, TurboTax will not provide advice on ethical decisions, flawed tax practices, or incorrect filing strategies.

Do I Need a Federal Employer Tax ID Number (FEIN) for My Home Business?

If you are a sole proprietor without employees and not planning to hire employees, you do not need a FEIN. You can use your social security number.

If you are a Single-Member LLC with no employees, you do not need a FEIN. You can use your social security number.

If you have Keogh Retirement Plan you are required to have a FEIN.

Any other business set-up requires a FEIN. Additionally, if you are looking for bank financing or are interested in setting up a bank business account, you may be required to have a FEIN. Getting a FEIN is free and simple; visit the IRS site to apply for one.

A Client Is Asking Me to Fill Out a W-9 Form For Tax Purposes, Why?

The W-9 Form is the official IRS form used by a company when they want you to send them your taxpayer identification number (either your social security number or FEIN). A business may send you a blank W-9 to fill out if you or your business is hired to provide services. Most often, a W-9 Form is sent to independent contractors, consultants, and other self-employed workers. Filling out a W-9 is straightforward. Just provide your name and social security number or the name and FEIN of your business.

If I Have a Home Business or Generate Self-employment Income, Will I Have To Pay Taxes at the End of the Year?

Self-employment income generated through the year will definitely have tax implications for you come tax time. There are so many individual variables when determining what is owed in personal/business taxes, it is impossible to make a blanket statement. For a self-employed individual, most of the time you will be required to pay both your regular income tax and your self-employment tax. Tax deductions can lessen the end-of-the-year tax burden.

Saving money throughout the year will help with any tax burden due at the end of the year. If you know you will owe taxes, you can also prepay your taxes via mail or electronically.

I am not a tax specialist or licensed tax attorney. The information provided here should be used as a general guide. For specific questions about your own taxes, please consult a tax specialist or refer to the official IRS publications.