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Tax deduction reduces taxable income, whereas a tax credit directly lowers the amount of taxes owed. In other words, deductions decrease the portion of income subject to taxation, while credits provide a dollar-for-dollar reduction in the final tax amount owed.
Generally, you are self-employed if any of the following apply to you.
As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly.
Self-employed individuals generally must pay self-employment (SE) tax as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, the wording "self-employment tax" only refers to Social Security and Medicare taxes and not any other tax (like income tax).
Estimated tax is the method used to pay Social Security and Medicare taxes and income tax, because you do not have an employer withholding these taxes for you. Form 1040-ES, Estimated Tax for IndividualsPDF, is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040 or 1040-SR. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.
Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax.
Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.
See the Estimated Taxes page for more information. The Self-Employment Tax page has more information on Social Security and Medicare taxes.
To file your annual tax return, you will need to use Schedule C to report your income or loss from a business you operated or a profession you practiced as a sole proprietor. Schedule C Instructions may be helpful in filling out this form.
In order to report your Social Security and Medicare taxes, you must file Schedule SE (Form 1040 or 1040-SR ), Self-Employment Tax. Use the income or loss calculated on Schedule C to calculate the amount of Social Security and Medicare taxes you should have paid during the year. The Instructions for Schedule SE may be helpful in filing out the form.
When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. Visit the Business Structures page to learn more about each type of entity and what forms to file.
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.
Use online account to securely access the latest information available about your federal tax account and see information from your most recently filed tax return. Go to https://www.irs.gov/payments/your-online-account to create your account so you can:
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