Reporting Self-Employment Income
For those who are self-employed, work as independent contractors, generate income via the gig economy, or receive income via 1099. Your income is classified as Schedule C income.?Schedule C income is treated different than wage income in the sense that taxes are withheld from wage income at the time you get paid. With 1099 income, that’s not the case. With 1099 income, the person receiving the money is responsible for paying the income tax themselves.
The upside to Schedule C Income
With Schedule C income you’re only responsible for paying tax on the profits you earn. You are allowed to deduct expenses that were pertinent to the generation of that income. For example, if you use your vehicle for ride-sharing services or delivery services, you are allowed to deduct a mileage expense for the mileage that you drove your vehicle for business purposes. If you sell baked goods, you are allowed to deduct the expenses that you paid for the ingredients to make those baked goods. ?
The downside to Schedule C Income
Schedule C income can be misleading. Say someone runs a cleaning service and invoices their clients. When their clients fulfill that invoice, it’s easy to look at the money as all yours. However, taxes are usually not withheld from 1099 income. This can create problems for people who aren’t organized or doesn’t keep detailed records because they fail to set aside money aside for taxes.
Estimated Tax Payments
As I mentioned with Schedule C income you are responsible for making sure the IRS gets their cut of the money you generate. If you are self-employed or receive 1099 income and expect to owe the IRS at least $1000, you are required to make quarterly estimated tax payments to the IRS. In a nutshell, an estimated tax payment is the amount of tax you owe at the end of each quarter based on the money generated during that quarter.
For 2023, estimated tax payments are due:
When it comes to estimated tax payments the IRS requires that you pay an amount equal to 100% of the tax you owed in the previous year, or 90% of the tax that you will owe in the current year. The simplest way to meet this requirement is to divide your tax liability for the previous year by 4 and pay that amount each quarter of the current year. However, the best way to be accurate and not owe anything at the end of the year is to pay each quarter based on the money you generated during that quarter. This method may result in you getting a refund when you file but with estimated tax payments it’s better to slightly overpay than it is to owe.
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