The tax season in the United States starts in April when millions of American citizens and residents who report taxable income for the calendar year are supposed to file their tax returns. Understanding the complex documents and doing all the math to figure out the total amount you owe the IRS gets super challenging.
The process is especially overwhelming for people who report income from multiple sources. You need to complete several self-employed tax forms, attach the required receipts and proof of transactions, get a print, and mail it to the IRS. The traditional way of filing income tax is often not a viable option, as most people end up making errors, which leads to penalties. The IRS sends a notice explaining the underpaid or overpaid taxes. This has led people to wonder if there’s any way they can automate income tax filing.
Rules for Self-employed Tax Filing
Around 121.9 million people were self-employed in 2021. If you are self-employed, you need to pay income and self-employment taxes.
Whether you are a full-time freelancer or have a side gig that earns you $400+ every year, you need to file income tax. A taxpayer is responsible for tracking their business expenses so that they can deduct them easily at the end of the year. They must also consider the tax burden before planning an expansion, investments, and any new financial project.
If you meet any of the following conditions, you are a self-employed individual.
- A sole proprietor
- Partner in a limited liability company
- Small business owner
- A professional
- Independent contractors
- Freelancer taking up gigs
To be considered liable for filing income tax, you must report a net earning of above $400. The IRS has set forth 92.35% of your net earnings as the total amount subject to income tax. You can arrive at the total dues by subtracting your business expenses, medical expenses, and another valid spending from your adjusted gross income for the year. Note that self-employment tax is to be paid even if you are eligible for social security benefits.
Self-Employed Tax Rate
The federal laws and the IRS have established a fixed percentage of the taxes you pay from your self-employment income. This is divided into Social Security (12.4%) and Medicare Taxes (2.9%). That means the total that goes to the internal revenue service from your self-employment income is 15.3%. Fortunately, you get a deductible of 50% (the equivalent of the employer’s portion of the tax).
If you work for someone, the income tax is split between you and the company. Of 15.3%, you are liable to pay only 8% of your adjusted gross income, and the other half is paid by your employer. This reduces your burden of paying the entire taxable amount alone. However, when you are self-employed, you are solely responsible for the Social Security and Medicare Taxes. That’s why the IRS has introduced a 50% deduction, which reduces your taxable income by half.
Only the first $137,700 of your income earned from self-employment is subject to the social security tax. Anything above that is not included. For Medicare, it’s different. If your wages for the financial year (from self-employment) exceed $200,000, you will be liable to pay 3.8% of the wages above this limit.
How Does the AI Tax Calculator Help File Your Income Tax?
The 50% deduction was one major deductible. The IRS keeps changing the laws regarding deductibles every now and then. After the Tax Cuts and Jobs Act of 2017, a lot of deductions that were earlier accepted are now removed, and new deductions are introduced. Although most of these changes are temporary and will expire in 2025, some will remain even after the act is no longer in effect.
More deductions mean you can save a lot on your taxes in the long run, but that also means a burden on a self-employed taxpayer who’s supposed to keep track of all their expenses. Not only that, but you need to save the receipts of every transaction so that you can show them to the IRS if you get audited.
Most self-employed individuals find the manual tax calculation pretty overwhelming, which is why they leave this part to a tax accountant or a professional who records all expenses as required. Still, there’s a chance of error when you do the complex math manually. The only viable way to maximize your savings and ensure that no expense is omitted from your income tax files, you should use an AI income tax calculator.
Here is how the AI tax calculator works.
- Link your expenses to the app
- Let the app verify each transaction and select the ones that are considered valid deductibles
- The app will ask you to accept or reject deductions
Once you have input the deductible expenses, wait for the app to calculate the taxable income after eliminating all the deductibles. This should give you a clear picture of all the expenses and the total amount you owe the IRS for the calendar year. You need to link the accounts that you make the payment through, and the AI will automatically add your expenses to the deductibles.
Before it subtracts the amount from your taxable income, it asks you to accept or reject the expense. It gives you full freedom to execute as many transactions as you want without having to record each manually. The AI tax calculator simplifies the deductible calculation part.
Which Forms are Needed for Filing Income Tax Returns for Self-employed Taxpayers?
As mentioned earlier, self-employed individuals need to file income tax and self-employment tax separately. How much tax you owe and which forms you should use for reporting the income depends on whether you are an independent contractor or a businessman. For self-employment income, the IRS has issued a set of 1099 forms that can be used to report your net earnings and expenses.
It is important that you pay your self-employment tax every quarter so that your dues do not exceed $1000. You need to pay the estimated tax every quarter and the balance with tax returns. Since you don’t have an employer who can withhold your taxes every quarter, your best bet is to pay estimated tax on a quarterly basis. Use Form 1040-ES to estimate the taxable income. This can be done with the help of your previous year’s income tax return documents. If you have just started freelancing and it’s your first time filling out the self-employment tax, you need to estimate taxes solely based on your judgment about the income you might earn for the year.
Those who overpay their quarterly taxes can use another form, 1040-ES, for the next quarter to adjust the balance. The same goes for taxpayers who underestimated their income for the quarter. You need to fill out another 1040-ES form and pay the balance.
First things first, you need to use Schedule C to report your income and losses from the business you’ve started or the profession you practice. Check out the Schedule C instructions to get a better idea of your annual returns. If you are facing any difficulty calculating your income or losses and the allowed deductibles, feel free to use the AI tax calculator. It will automate everything and make the process of filing your income taxes a whole lot easier.
Calculating Home Office Deductions
The 2020’s COVID pandemic made work-from-home a new standard. Since a vast majority of employees are now working remotely or in a hybrid setting, home office deductions have become part of the deductibles. Whether you are taking a standard or itemized deduction, you can subtract a considerable amount from your income as expenses.
Calculate the total space you have dedicated to office use. This shouldn’t exceed 300 square feet if you choose the standard deduction. You can multiply every square foot with $5 and get a deduction of up to $1500. Make sure this space is strictly used for work purposes without a desk or anything you can use for personal work. You also need to show the IRS that you have saved this space for business.
The IRS allows you to deduct 100% of certain expenses on your home office deduction, such as repairs and replacements. Other than that, a portion of your home expenses is also deductible from your adjusted gross income. This includes a small percentage of the total expenses. For instance, if you have used 15% of your total home space for office purposes, you can deduct 15% of the water, electricity, and other bills. Add to this the Wi-Fi, phone bills, vehicle expenses, and all expenses related to your home office.
There are several 1099 forms that a self-employed individual needs to file to report their exact income and expenses for the year and make other adjustments for the calendar year. Use IRS Form 8829 to calculate expenses for business use. If you are facing other difficulties calculating your net earnings, use the AI tax calculator.