U.S. Tax Preparation Worldwide James Maertin CPA
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If you work for yourself, you are considered self-employed. Self-employed persons include those known as independent contractors or as sole proprietors of an unincorporated business. A big advantage to this status is that you can deduct business expenses almost without limitation. For ideas on deductible business expenses, please have a look at my extensive list of Deductions. Please also refer to IRS Publication 535, Business Expenses and Publication 334, Tax Guide for Small Business.
As of tax year 2018, you may also be able to deduct up to 20% of your qualified business income from your qualified trade or business, plus 20% of your qualified REIT dividends and qualified PTP income. See Qualified Business Income Deduction for more information. There are limits, including a phaseout for the deduction.
While deduction possibilities are generous, being self-employed also means that in addition to income tax, you will have to pay your own social security and Medicare taxes (known as self-employment tax when they apply to self-employed people). If you were an employee, your employer would pay 7.65% of your wages for social security and Medicare, and another 7.65% would be withheld from your pay, but as a self-employed person the full 15.3% is assessed on your net income (gross income minus business deductions) from self-employment.
Nevertheless, since this is computed on your net self-employment income, rather than on gross income, you may not be that much worse off, especially if you have a lot of business expenses. Also, you are allowed to deduct half of the self-employment tax, so the effective rate becomes closer to 13%. In any case, I will calculate these amounts on your tax return.
If you have substantial self-employment income you probably should start making quarterly estimated tax payments. I will provide you with payment vouchers when your tax return is ready.
It is important to keep detailed records of your income and expenses for 3 years. The IRS will want to see them if you are audited. Be aware too that if the IRS determines that you have underreported your gross income by more than 25% they can go back 6 years in an audit.