Being a self-employed freelancer in America is a dream come true for many. However, that dream takes a rather nightmarish turn when the tax season approaches. It is common knowledge that the paycheck of W-2 employees, such as salaried employees, never matches their full salary because the employer withholds certain payroll taxes. In the case of a freelancer, the entire process of tax estimations, understanding tax forms and making deductions become their responsibility. Thus, a little knowledge goes a long way. The first to tax filing for freelancers is by getting into the crux of the several self-employment tax forms.
DEFINITION OF SELF-EMPLOYMENT TAXES
To ensure that self-employed individuals would contribute toward Social Security and Medicare, the federal government passed the Self-Employe Contributions Act (SECA) in 1954. The act establishes that all self-employed individuals must pay the full 15.3 percent of the Federal Insurance Contribution Act (FICA). Within the purview of the IRS, when someone is self-employed, they are treated as both the employer and the employee. Therefore, they have to pay both shares of the FICA (otherwise split in half between employers and employees for salaried work at 7.65 percent).
Now that we have touched upon the basics of self-employment taxes, let us look at the top five self-employment tax forms that every 1099-NEC worker should know about.
TOP FIVE SELF-EMPLOYMENT TAX FORMS, AND WHO SHOULD FILE THEM?
Schedule SE (Form 1040 or 1040-SR) - It is the first tax form that every taxpayer has to fill. You must use Form 1040 to calculate the tax due on net self-employment income. Schedule C's net income information determines the self-employment taxes you owe for social security and Medicare taxes. You have to file an SE (1040) if your earnings by self-employment are more than USD 400 per year.
Form 8829 –It is another self-employment tax form intended for persons working from their homes. By using this tax form, you can calculate the allowable costs for the business usage of your home on Schedule C and make deductions accordingly. However, just because you manage your office at home does not mean you can write off all your house bills. The deduction is restricted to the percentage of your assigned to your profession. You can also deduct items like furniture rent, phone bills for business use, etc.
Form 1099-NEC – It is a tax form meant for all freelancers and independent contractors who earn USD 600 or more through self-employment in a year.
Form 1040-ES – It is a form that declares the estimated taxes for self-employed persons. By estimated taxes, we mean the classification applicable to incomes not subject to withholding. The difference between IRS Form 1040 and Form 1040-ES is that the former calculates the previous year's dues, whereas the latter computes the taxes for the current year. If you are an independent contractor or freelancer, you should file the 1040-ES tax form.
Schedule C – All persons who want to report their income and expenses from sole proprietorship should file a Schedule C tax form.
HOW DO AI-POWERED TAX CALCULATORS HELP?
America now has 36 million freelancers, of which 25 percent forget to pay their quarterly taxes. Calculating all the IRS dues on your own is overwhelming, and constantly scouring through the different tax forms is also tricky. Thus, AI-powered tax calculators like those of Flyfin can make the life of freelancers easier by making all the deductions, covering the tax brackets, and much more quickly and efficiently.
You can also Read IRS form1040: What is it and Where to file?
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