Deciphering the Language of Taxes: How to File When You Own Your Own Business
If you're an independent contractor, you know that tax season is a different animal for you. Even if you are writing from the back bedroom of your house, when you get a 1099, you are essentially being taxed as a small business. Sorting out the mumbo jumbo of Schedule A and Schedule C and 1099x or 1099y can be a major feat in and of itself. If you're stressing about your new business taxes, here's a little break down of the terms and concepts you'll want to know about before you start.
The 1099 form is given to an employee when they are an independent contractor who gets a flat rate for a service. This means that throughout the year, the contractor's paycheck will be the exact rate of pay without any taxes deducted. That's great at the time, but it means that your tax season will be a little more complicated than those filing with W-2s. Don't be scared, however, there are a lot of extra possibilities that come with the territory of the 1099, but you need to know what they are in order to take advantage of them
The 1040 ES
OK, once you've established yourself as an independent contractor, you need to determine how often you need to pay taxes. Fill out the 1040 ES to determine whether you need to pay taxes on a quarterly basis.
SE tax stands for self-employment tax. Self-employed individuals must pay SE tax and income tax. SE tax is Social Security and Medicare tax. Where an employer is required to pay half of an employee's taxes, they are not required to pay any part of the taxes for a self-employed contractor. In order to figure out what your SE amount is, you'll need to figure out what your net loss or net gain is when it comes to the self- employed business.
1040 Schedule C
If you are going to claim business expenses, you'll need to fill out a 1040 Schedule C, which will allow you to figure out your losses and gains.
Figuring out Your NOG or NOL
Figure out your net loss or gain by subtracting your expenses from your income. If you have more than one business, you must figure out your net profit/loss for each business on a separate schedule. If you have a loss, it is termed a net operating loss or NOL. These are costs you will want to deduct from your earnings:
office space rent or mortgage
car costs including gas as related to business expenses
other costs of running your business
interest paid on business-related costs
legal fees associated with running the business
real estate taxes associated with the place where you do business
sales tax associated with business costs
entertainment that falls within the perimeters for business use
These are costs you cannot deduct from your earnings:
loss of earnings based upon sickness or disability
legal fees associated with acquiring your business
personal and living expenses
repairs to your property that increase the length of its life
If you operate your own business, filing taxes is more important than ever. Make sure to do your homework so that you don't miss deductions that will make your taxes easier to bear.