Moving from Employee to Self-Employed? Here’s what it means to your taxes.

by Mounica Kota | Nov 12, 2020 | Employee management, self employment tax

Moving from Employee to Self-Employed?

Here’s what it means to your taxes.

If you had some hobbies or areas of interest and that has turned into your side business now, then it would be an advantage for you. You would be able to make some additional income; however, you would have to think about the taxes related to the additional income earned.

You must be very well aware of your federal income taxes but you have new areas to address once you are self-employed. According to the IRS rules, you would have to report to the IRS about the expenses and the income earned from your business or self-employment. This needs to be done while filing your federal income tax returns. This process of reporting the income and expenses associated with self-employment is not very critical and can be done easily once you are aware of the steps.

Quarterly Estimated Tax Payments.

While you are an employee, your employer would be deducting withholding taxes from your salary every year. But, when you are self-employed you would have to make estimated tax payments every quarter. The general rule is that you would be expected to make a quarterly estimated tax payment if you are liable to pay $1000 or more as your annual federal tax. In case, you have a new business then an estimate of your net profit must be estimated to calculate your quarterly estimated tax. You can make use of various tools and online applications to calculate the estimated tax payments. Some of the applications can automatically calculate the estimated tax payments that need to be paid off.

The schedule for the payment of the Quarterly Estimated Tax Payments is:-

15^th April
15^th June
15^th September
15^th January of the next year

However, this year due to the COVID-19 related situations the schedule for the payment of the first and second estimated tax payment had been extended until 15^th July 2020. If the 15^th of the above-mentioned schedule falls on a weekend or it is a holiday, then the estimated tax payment would be made on the upcoming weekday.

Filing of the quarterly estimated tax payments or can be done by the e-filing method. Payment of your quarterly estimated tax can be done by the EFTPS (Electronic Federal Tax Payment System).

In case, you have been an employee and also owned a business during the year then you can have more amount taken from your salary so that there would be an offset in the estimated tax payment. Moreover, you must keep in mind that there are some tax credits available according to the provisions of the CARES Act. These credits have been introduced as a measure for providing relief from the adverse economic impacts caused by the pandemic COVID-19. These credits can be taken into consideration for reducing your fourth estimated tax payment.

Self-Employment Tax Calculation.

The self-employment taxes are paid by self-employed individuals for Social Security and Medical care. When you were working for an employer, you were paying FICA tax that was 7.65% of your gross income. Your employer would pay a matching percentage i.e. a total of 15.3%. But, in self-employment, you would have to pay a total of 15.3% as the self-employment tax. IRS would allow you to deduct half of your tax levied on self-employment against the income generated for federal income tax.

Income Tracking and Expenses.

For estimating your self-employment tax, you must track your income and expenses thoroughly.

Your retirement plan.

When you are self-employed, you would not have a retirement plan offered by the employer. So, you would have to save a considerable amount for your retirement.

Individual Retirement Account (IRA) – The simplest method of setting up a retirement plan if you are a self-employed individual and have a new business.
SEP IRA – You can contribute 25% of your net income earned from your business up to a maximum amount of $57,000.
401(K) plan – This retirement plan is meant for an individual and can also include your spouse.

Your health insurance.

If you are a self-employed individual, you would have the below-mentioned options for health insurance coverage.

Your previous employer’s plan will give you coverage for 18 months.
If your spouse has a medical insurance plan offered by his employer, then you can obtain coverage under that plan.
Purchase a health insurance plan from the health insurance marketplace.

Conclusion.

So, self-employment can help you in bringing additional considerations related to taxes. You can also make some planning for your retirement and provide coverage for health insurance.

Self-Employment Tax

by Mounica Kota | Jan 21, 2019 | self employment tax, Taxtips

The most beneficial deductions are business deductions that offset both income tax and, depending upon the circumstances, self-employment tax. For 2018, the self-employment tax rate is 12.4% of the first $128,400 of net self-employment income plus 2.9% for the Medicare tax, with no cap. Some high-income taxpayers may pay an additional 0.9% Medicare tax. For self-employed businesses with less than $128,400 of net income, the self-employment tax rate is 15.3%. Thus, for small businesses with profits of less than $128,400, the benefit derived from deductions generally will include the taxpayer’s tax bracket plus 15.3%. For example, for a taxpayer in the 24% tax bracket, the benefit could be as much as 39.3% (24% + 15.3%) of the deduction. If the deduction were $2,000, the tax savings could be as much as $806 or more, when the taxpayer’s state income tax bracket is included. It might so happen that one fine day you decide to pack your bags and come back home. When you do, there are a few things that you must take special care of. For starters, your investments and tax implications. In general, the tax laws for NRIs returning to the country are fairly generous. However, you must not be complacent. A bit of careful planning will ensure that you do not run into any surprises when you come to India, as far as your overseas income and investment are concerned. Tax Resident Status Your tax liability on the income largely depends on your residential status. The FEMA (Foreign Exchange Management Act) and the Income Tax Act govern all these tax rules and regulations. The FEMA keeps a track of all the transactions taking place outside the country for Indian residents. These transactions include foreign bank accounts, money transfers, remittances, lending, gifting, etc. Any investment in real estate or mutual funds is also taken care of by the FEMA. The income tax act on the other hand, looks after the tax liability arising out of such investments. As per the FEMA guidelines, an NRI is someone who currently stays out of India but either is a citizen of India or a person of Indian origin. They must meet either of the following conditions to become a PIO or a person of Indian origin.

Tips to Reduce Self-Employment Taxes

by Mounica Kota | Jan 30, 2018 | Investment & Income, self employment tax

Tips to Reduce Self-Employment Taxes

Tips to Reduce Self employment Taxes.Self-employed individuals need to pay self-employment taxes on the top of income tax. It might seem a bit harsh on some individuals. The self-employment taxes help federal programs such as social security and Medicare. So here are some ways by which you can cut down your tax liability if you are self-employed.

Corporation

In the event that you have created a corporation or limited liability company, you can benefit as a self-employed individual. If you proceed with an S Corp election, you might be able to reduce your tax liabilities under self-employment taxes. S Corp allows you to pay yourself from the profits and distribute the rest among shareholders or other employees. It also allows you to draw a reasonable amount from the total earning as salary. If the amount exceeds certain limits, it would come under income tax and not employment taxes.

SE Declaration

As per the guidelines set by the IRS, anyone making more than $400 out of self-employment is liable to pay taxes and has to file tax returns. You must include a Schedule SE with your tax returns which help you calculate how much self-employment tax you owe to the government. There is a small catch over here. When you fill out the Form 1040, as per IRS guidelines you can adjust your income by deducting a portion of your self-employment earnings. This clause lets you reduce your self-employment tax liability between 50-57% depending on your earnings.

Business Expenses

IRS has a few clauses that can help self-employed individuals to reduce their tax liabilities. One of them is declaring expenses. You can declare various business expenses if they helped you in any form to continue with your work. Of course, you cannot include leisurely trips as part of the expenses. Money spent on items such as advertising, office space, supplies and business related travel qualify for this. Let’s assume your taxable income is $40000 and you went on a business trip which accounted to $5000, your net taxable income would be $35000.

Health Insurance

This is one of the most visible advantages of self-employed over normal employees. Self-employed individuals can claim their entire health insurance costs. As long as you had some profits for the year, you can go ahead and claim your health insurance in full. When you deduct the health insurance amount, your taxable income for the specific year reduces, thereby reducing your total tax liability.

Deferred Income

Deferring your income to a later date is another smart way of reducing your tax liabilities for a specific year. Don’t worry, we are not asking you not to get paid at all, rather defer the payment depending on the timings. Since you are responsible, you can decide when you want the payment. Deferring the payment by a few days or weeks might enable you to pay lower self-employment taxes. For an example, if due to $3000 you are getting into the next bracket of tax, you can defer the same for the next month, provided the payment is really close to financial year end. Of course, you need to access if you need the money or it can wait for some time or not.

Home Office

If you use your home for your business purpose, you can deduct some amount from your taxable income on the front of expenses such as utilities, any rent paid or insurance of home. In fact, IRS has a simplified process that you can benefit from.

Measures mentioned above should help you as a self-employed individual to understand and brings down your self-employment tax liability. bulgari copy
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