Wisely pre-planning to meet tax obligations and recording businesses expenses can help self employed individuals maximize their earning potential.
For tax purposes, the IRS considers any financial gains over $400 to be earned income and therefore taxable. If you are self employed, your reportable income is taxed at a higher rate to cover social security deductions. Income from self employment also requires filing additional pertinent tax forms.
Careful itemization of business expenses and establishing certain types of retirement funds can help offset self employment tax liabilities. It also enables the self employed individual to invest for retirement as they might if they were employed by a business who offered 401(k) or other pension plans.
The nature of your business will help determine if you should structure it as a sole proprietorship, partnership, corporation, or limited liability corporation. Your accountant or a Small Business Administration advisor can help you decide which structure would be most financially advantageous.
The following sites provide useful tax information for self employed individuals or for those contemplating pursuing this employment direction:
- Illinois workNet
provides links to Small Business Administration, Illinois Entrepreneurship Network, and other assistance avenues for self employed individuals.
- Internal Revenue Service provides in-depth guidelines and fact sheets for small businesses and self employed individuals. Topics such as which occupations are considered as self employment, earned income tax credits, and filing requirements are covered.
- Internal Revenue Service provides a guide for selecting a business structure and which tax forms you will need to use for each.
- Social Security Online explains how self employed persons add to their Social Security funds through their IRS tax liabilities.
- Ask the Advisor explains self employed retirement plans such as SEPs, Keogh Plans, Solo 401(k), and Roth IRA.
- Archived Illinois workNet articles about self employment careers can be retrieved by entering “self employment” in the Search Site box.
- Small Business Taxes & Management explains self employment tax.
Self employed individuals may find the book, Working for Yourself by Stephen Fishman, a helpful tool for exploring tax structures and other important topics.