Did you know? According to the most recent estimates published by the US Bureau of Labor Statistics (BLS), the number of self-employed people in the US is 9.379 million as of November 2020.
In April 2020, the number of self-employed people in the United States dropped 12.88 percent from the previous month to 8.247 million. This was also a 10.86 percent drop from the previous year. This was caused by the COVID-19 pandemic, which for many self-employed Americans turned into job cuts and company closures.
However, if you are a freelancer, independent contractor, or small business owner, it is important to know how to get your taxes done properly. This can help you to save money, something essential in this economic crisis.
You must calculate your net profit or net loss from your business before determining whether you are entitled to self-employment tax and income tax. This is accomplished by deducting your business costs from your business revenue. If your expenses are less than your profits, the difference is called net profit, and it appears on page 1 of Form 1040 or 1040-SR as part of your income.
If your expenses exceed your income, the difference is your net profit, which appears on page 1 of your Form 1040 or 1040-SR as part of your profits. If your expenses exceed your revenue, the difference is referred to as a net loss. On page 1 of Form 1040 or 1040-SR, you will normally subtract your loss from your gross profits. However, in some cases, your loss is minimal.
Self-employment tax rate
As a self-employed individual, you must file an annual tax return and pay estimated tax quarterly. Self-employment income is taxed at a rate of 15.3 percent of net earnings. The rate comprises a 12.4 percent Social Security tax and a 2.9 percent Medicare tax on net profits. Income tax is not the same as self-employment tax.
If you’re self-employed, it’s important to review what you are allowed to deduct each year in order to make your business as profitable as possible. Changes to certain tax laws were signed into law in March of 2020. For the period beginning March 27, 2020, and ending December 31, 2020, self-employed individuals may defer payment of half of the Social Security tax levied under section 1401(a) of the Internal Revenue Code on net earnings from self-employment income. (This time is referred to as the “payroll fee” in Section 2302 of the CARES Act.)
What can you deduct?
Self-employment will also provide you with many tax benefits. One is the eligible business income exclusion, which allows you to subtract up to 20% of your self-employment net income from your taxes.
Even though the coronavirus’s pandemic made a huge negative impact on everyone’s life, it has made the government take some taxation actions to help self-employees.
We are talking about, for example, the home office deduction. It would be best if you made the following deductions: A part of your mortgage or rent; property taxes; utility, repair, and maintenance costs; and other related costs. In most cases, this exclusion is only applicable to self-employed individuals; workers are normally ineligible to claim the home office deduction.
You can calculate your home office deduction using one of two methods: the traditional method or the simplified method, and you don’t have to use the same method every year. In order to comply with the standard process, you must measure the real home office expenditures and keep accurate records in case of an audit. The simpler alternative allows you to multiply your home office square footage use only and regularly for business or business related activities.
If you keep studying, it is also a good opportunity to deduct taxes. Any education expenses you want to deduct must be related to maintaining or improving your existing business skills. However, the expenses are deductible only if the education maintains or improves your present work skills.
You can also deduct about $1 for every two miles you use your car for business purposes, let’s say, delivery, pickups, meeting vendors, or clients.
This year, if you work from home, you have the opportunity to deduct part or all of your annual cell phone or internet bill. This only applies if you have a dedicated business cell phone or internet connection.
There is more information about taxes and what you can or cannot deduct. We suggest contacting an experienced professional to help you through the process. You have to be careful and avoid making mistakes that can cost you money.