Paying estimated taxes critical for self-employed
WASHINGTON (AP) — Some people work for themselves because they like the autonomy. Others have been unable to find full-time, regular jobs and have had to settle for contract work for a specific project or period of time. And still others have retired but have been brought back as consultants by their former employers.
Contract workers, consultants, freelancers or the self-employed — these workers face additional challenges when it comes time to file their income taxes.
They won't receive the traditional W-2 that other workers get reporting income and taxes paid. Instead, they'll receive a 1099 form with their earnings from each of their employers.
However, employers aren't required to provide 1099 forms if income is less than $600. Still, all income, even if there is not a 1099 form, is required to be reported to the Internal Revenue Service.
Since self-employed individuals or contract workers don't have taxes withheld from their pay, they could be in for an unpleasant surprise. "You could be really hurt if you haven't paid any estimated taxes," said Jackie Perlman, principal tax research analyst with The Tax Institute at H&R Block.
Not only will these workers have to pay taxes on income earned, they'll also have to pay a self-employment tax, said Barbara Weltman, contributing editor to "J.K. Lasser's Your Income Tax 2013."
That self-employment tax is equivalent to both the employer's and the employee's share of Social Security and Medicare. For 2012, it is 13.3 percent, 10.4 percent for Social Security on income up to $110,100 and 2.9 percent for Medicare on all income.
And, they may be subject to a penalty if they did not file estimated taxes.
But there is a bright side.
"The tax code smiles on people who are self-employed," said Mark Steber, chief tax officer for Jackson Hewitt Tax Services. That's because you can offset the true cost of doing business, he said.
Did you take a potential client out to lunch? You can generally deduct half the bill as a business meal.
Did you have to purchase a printer to produce invoices? That, too, can be deductible, as well as the paper and toner that you've used for the business.
Did you use your car for work other than commuting, to see a customer or to go to that business meal, for example? The IRS mileage rate for 2012 is 55.5 cents for each business mile driven.
"Make sure you know where those deductions are because there are a lot of them," Steber said.
To be deductible, a business expense has to be both ordinary and necessary, according to the "Ernst & Young Tax Guide 2013."
News Photo Galleriesview all
- 20415Oklahoma weather: Crews work to clear storm damage in Oklahoma City as the state braces for severe weather Sunday.
- 7078Oklahoma Severe Storm Updates
- 7023OKC Thunder: Thunder trio praise fans before potential departures
- 6616OKC Thunder GM Sam Presti won't amnesty Kendrick Perkins
- 5593Student shot dead during botched home invasion
- 4449Wild hogs continue to be a growing menace across Oklahoma
- 4211Oklahoma State football: Todd Monken thinks Wes Lunt should've stayed in Stillwater