Numerous tax aspects to consider
Being self-employed has its advantages and disadvantages. As the person in charge of your business affairs, you can set your own schedule and generally have more flexibility than someone in a 9-to-5 job. On the other hand, you are fully responsible for the bottom line, often with little or no backup to rely on.
What about taxes? There are a number of special considerations for self-employed individuals.
Generally, you are required to file an annual return and pay your tax liability in quarterly installments, as opposed to regular employees who have these amounts withheld from their paychecks. This includes requirements to pay both income tax and self-employment tax, the equivalent of federal payroll taxes owed by employees.
The amount of tax you owe depends on your self-employment income. Essentially, this is the business income minus your expenses, used to determine your profit or loss. If you show a profit, you owe income tax and self-employment tax on the amount. Conversely, you may be able to deduct a loss against your other income for the year, subject to certain rules and limits.
For 2017, the rate for self-employment tax is 15.3% on the first $127,200 of self-employment income and 2.9% on self-employment income above that annual base. This is double the rate for regular employees, but half the self-employment tax you pay for the year is deductible on your personal tax return.
The quarterly due dates for paying tax throughout the year are the same as the due dates for other taxpayers such as retirees.
These dates are:
- April 15 for the first quarter;
- June 15 for the second quarter;
- September 15 for the third quarter; and
- January 15 of the following year for the fourth quarter.
Note: If the due date falls on a weekend or holiday, it is moved to the next business day.
In addition to these basic tax requirements, self-employed individuals may realize certain tax benefits. For instance, if you work out of your home, as many self-employed individuals do, you may qualify for home office deductions because the home is the principal place of your business. This enables you to write off expenses directly related to your home office plus a portion of other home expenses—such as utilities, repairs and insurance—based on the business percentage use of the home. Regular employees who work from home at night and on weekends typically do not qualify for this deduction.
Similarly, if you use a vehicle to drive to and from business activities, you may deduct costs relating to the vehicle, based on the business percentage use. Be aware that there are strict recordkeeping rules and other restrictions in this area, but vehicle deductions can result in significant tax benefits if you toe the line.
Finally, you could claim other tax breaks available to other businesses, including deductions for your “ordinary and necessary” business expenses. Again, special rules and limits may apply.
This is only a general overview of some common tax aspects for self-employed individuals. Contact your KOS Tax Advisor for more detailed assistance regarding your particular situation.