Help for self-employed on complicated taxes
BY TERRY SAVAGE Sun-Times Columnist Feb 4, 2007
Updated: May 3, 2013 12:14PM
About 134 million Americans will file tax returns in the coming weeks. And about 20 million of those returns will include Schedule C, the page that reports your income from self-employment. Whether you're a free-lance writer, a baby-sitter or a seller on eBay, if you have earned income that wasn't taxed as wages, you must file Schedule C.
Figuring out how much you owe in taxes can be quite a challenge for the self-employed. It becomes even more complicated if you also have a regular job, with income that is reported from your employer on a W-2 form. Separating not only income, but deductions, could be a paperwork nightmare.
That's where TurboTax Home and Business comes in. The latest version of this product serves as a guide to sorting out your personal and business income and deductions. One click displays all the forms you need, both your personal 1040 form and the Schedule C, which will be filled out together.
Finding deductionsLife will be a lot simpler at tax time if you've kept a separate checking account and credit card for your business. Then the payments that you've deposited into your business checking account provide a simple record of your income.
It's your job to make sure you report all income. Remember, other companies that pay you will report those payments to the IRS as an expense of their business.
Deductions are the other side of your tax ledger. The TurboTax program will help you determine which of your expenses you can write off against that income, making it easy to complete Schedule C.
Then the program guides you through the more traditional 1040 form for your non-self employment income and deductions.
If, for example, both you and your spouse have income from a job, you'll enter those figures from your W-2. Your traditional deductions such as mortgage interest, charitable contributions and child care expenses will all go on the appropriate lines.
Now, with a click of your mouse, you can merge your two existences as a wage-earner and an entrepreneur to create your tax return.
Your income tax is calculated based on all your taxable income -- from your W-2 and your self-employment. But your self-employment tax is calculated only on your business income. These two taxes are added together to come up with the total tax on your federal tax return.
Just like the FICA tax on your wages, the SE tax for self-employed people is made up of both the Social Security tax and the Medicare tax.
For 2006, Social Security tax is calculated on the first $94,200 of income from all sources. Medicare tax is calculated on all of your income.
If you are an employee, you pay 6.2 percent of your income for Social Security tax and 1.45 percent for Medicare tax (these are withheld from each paycheck). Your employer pays an equal amount on your behalf.
For your self-employment income, you must pay both the employer and employee portions -- 12.4 percent for Social Security (on your income up to $94,200) and 2.9 percent for Medicare. But you do get to deduct half of your self-employment taxes on Line 27 of your 1040 form.
Obviously, there was no withholding on that self-employment income, so be prepared to pay a federal, and possibly state, tax bill.
You could ask your employer to withhold more taxes from your wages to cover the amount due on your self-employment income next year.
Increase your withholding taxesIf your withholdings do not cover your tax obligation, you must file a quarterly estimated payment covering at least 90 percent of the previous year's tax. To avoid that problem next year, TurboTax will help you calculate a quarterly estimated payment, and send you an e-mail reminder of when those payments are due.
TurboTax for Home & Business costs $89.95, either at a local retailer or downloaded from www.TurboTax.com. Included in the price is one state tax program, which you must download.
Making money on your own small business complicates your tax filing. But now there's inexpensive help so you don't spend all your profits on tax preparation. And that's the Savage Truth.
Terry Savage is a registered investment adviser. Check out Terry's answers to reader questions at suntimes.com, and click on Business. Distributed by Creators Syndicate.