There are a few considerations to be mindful of, and we’ll walk you through them here!

Do you have questions about your self-employment taxes? Check out our Guide to Gig Worker Taxes.

What is self-employment tax?

It may seem that self-employment tax encompasses all the taxes you might pay when you’re self-employed. In reality, it specifically covers Social Security and Medicare taxes. In other words, if you’re self-employed, you pay into Social Security and Medicare programs through self-employment tax (SE tax).

If you’ve ever worked as a W-2 employee, you may recall these taxes are covered as part of your payroll tax. For W-2 wage earners, the payroll tax rate is 7.65%.

How much is self-employment tax? What’s the self-employment tax rate for 2024?

Self-employment tax isn’t a fixed figure — it depends on your net earnings, which is your profit or loss after business deductions. For the 2023 tax year, the self-employment tax rate is 15.3%. The rate is made up of:

· 12.4% Social Security tax

· 2.9% Medicare tax

For 2023 taxes, the first $160,200 of self-employment net earnings is subject to Social Security. For 2024 taxes, that amount is the first $168,800.

All self-employment net earnings of more than $400 is subject to self-employment tax. A 0.9% additional Medicare tax may also apply if your net earnings exceed the threshold of $200,000 for Single filers and $250,000 if you’re filing jointly.

How to calculate self-employment tax

Here’s how to calculate self-employment tax.

1. Determine your net earnings from self-employment: This includes income from freelance work, gig economy jobs, or your business. Make sure to subtract any qualifying business expenses. If you file a Schedule C you can use the net profit calculated on that form.

2. Multiply your net earnings by 92.35%. If your net earnings are more than zero then multiply your net earnings by .9235. This accounts for the fact that you only pay self-employment tax on 92.35% of your net earnings. (You use this percentage since employees pay half of Social Security and Medicare taxes or 7.65% of their total wage income.)

3. Calculate the Social Security portion. Multiply the smaller of step two or $160,200 by the current Social Security tax rate, 12.4%.

4. Calculate the Medicare portion: Multiply the result from step two by the current Medicare tax rate, 2.9%. Unlike Social Security, there is no income limit for Medicare taxes.

5. Add the Social Security and Medicare portions to get your self-employment tax amount.

An example of calculating self employment taxes

1. Sal makes $50,000 in net earnings from his rideshare job. He wants to calculate self-employment taxes for the tax year.

2. He multiplies his net earnings ($50,000) by 92.35% and arrives at $46,175.

3. He determines the Social Security portion by taking the total self-employment taxes due, $46,175, by the Social Security tax rate, 12.4%, to arrive at $5,725.7.

4. He then calculates the Medicare portion by multiplying $46,175 by 2.9% to arrive at $1339.08

5. He arrives at finding the self-employment taxes due by adding the Social Security portion ($5,725.7) and Medicare portion ($1,339.08), totaling $7,064.78.

Net earnings: $50,000

Self-employment tax on 92.35% of your net earnings: $50,000 x 92.35% = $46,175

Social Security portion: $46,175 x 12.4% = $5,725.7

Medicare portion: $46,175 x 2.9% = $1,339.08

Total self-employment tax: $5,725.7 + $1,339.08 = $7,064.78

Self-employed tax deductions

Here’s the good news about self-employment taxes … you get to take a self-employment tax deduction! You can deduct the employer portion of your self-employment tax as an adjustment to income on Form 1040. The amount you can take as a tax deduction is usually half of the employer’s portion. This decreases your taxable income and, as a result, your federal income tax. Here are some other self-employed tax deductions you can take.

Who must file self-employment taxes?

If your net earnings from self-employment equal $400 or more, you need to:

· File Schedule SE

· Pay any self-employment tax due

This is true regardless of your age, and even if you receive Social Security or Medicare benefits.

You’re considered self-employed if you own a business or are an independent contractor and receive a 1099 form. Because tax is usually not withheld from self-employment income (nonemployee compensation), you could be required to make estimated tax payments during the year to cover your federal income tax and SE tax.

What happens if you don’t pay self-employment tax?

If you don’t pay self-employment tax, you could run into issues. In fact, taxpayers sometimes don’t understand this rule and end up with an IRS CP2000 Notice from the IRS.

Related read: Learn how to address an IRS CP2000 notice.

Self-employment tax forms

Self-employed tax forms and returns vary depending on your business designation (business entity). Here’s a rundown:

· If you are a single-member LLC or sole proprietor: IYou will report your business revenue and expenses on IRS Schedule C (Form 1040) in most cases. Use Schedule SE to figure out how much self-employment tax you owe if you earn more than $400 in business profits per year.

· Non-LLCs or sole proprietorships: Use the business return to file a Schedule E with your individual return. Then, use the number from Schedule E to fill out Schedule SE.

For example, a partnership files Form 1065 and provides a Schedule K-1 to its partners. The partners use the information from the Schedule K-1 to complete their individual return and Schedule SE.

Note: If you have an S corporation you do not have to pay SE tax on your share of the business’ income.

Get more help with SE income and taxes

By understanding the steps involved in SE tax, you can successfully stay on top of your self-employment tax obligations. Remember, there’s always help nearby. Don’t hesitate to lean on our online tax software or a tax professionals. In fact, there are a few ways our H&R Block can help:

· Have a side business? Take control of your taxes and get every credit and deduction you deserve with our online tax software. File with H&R Block Online Deluxe (if you don’t have business expenses) or H&R Block Online Premium (if you have business expenses).

· Have questions about self-employment taxes and other small business tax issues? Rely on our team of small business-certified tax pros at Block Advisors to get your taxes right and keep your business on track. Find out how Block Advisors can help with your small business taxes.

· Curious if you’ll get a refund? Whether you’re a W-2 vs. 1099 worker, you can use our tax calculator to help determine your tax outcome.

The post Self-employment tax: Definition, rates, and how to calculate appeared first on H&R Block.

This form is used by businesses to report payments made to nonemployees, like independent contractors or freelancers. You don’t fill out this form – the business that hires you does! Consider what to remember as we cover all the form details and 1099-NEC instructions for filing.

What is a 1099-NEC?

The 1099-NEC is the Internal Revenue Service (IRS) form to report nonemployee compensation—that is, pay from 1099 independent contractor jobs (also sometimes referred to as self-employment income). Examples of this include freelance work or driving for companies like Uber, Lyft, or DoorDash. If you’re not on a company’s payroll but work for them independently and you’ve made at least $600 during the year, there’s a good chance you could receive this form.

1099-NEC vs. 1099-MISC

If you’re an independent contractor who has received Form 1099-MISC in the past, you’ll now receive Form 1099-NEC instead. Previously, companies reported this income information on Form 1099-MISC. The Internal Revenue Service introduced the new independent contractor tax form in the 2020 tax year as part of the Form 1099 series as an information return. Aside from the form’s name, not much else has changed for form recipients. Find details about other types of 1099 forms.

Do you need more help with a Form 1099-NEC you received from independent contractor work? Check out our Guide to Gig Worker Taxes.

What is nonemployee compensation?

If you’re totally new to nonemployee compensation—and given the continued rise in gig workers, there’s a good chance you are—read on. There are important tax considerations to know about now, so don’t wait until tax time. Gig worker taxes are something you want to wrap your head around well before it comes time to file your tax return.

Nonemployee compensation is paid to 1099 independent contractors, not W-2 employees. If that distinction doesn’t ring a bell, be sure to review the difference between employee and independent contractor work statuses.

From a tax standpoint, here’s the main difference:

• Employees: Employers will take out various payroll taxes (such as federal and state taxes) from employees’ paychecks. At tax time, employees will receive a Form W-2 from their employer. (Note: A W-2 form should be issued to an employee by the deadline, which is on January 31st).
• Independent contractors: As an independent contractor, your check won’t have any payroll taxes withheld. That means paying as you go falls on your to-do list. At tax time, you’ll receive Form(s) 1099-NEC to show the total amounts you were paid for the year.

So, how should independent contractors pay taxes on the nonemployee compensation shown on this 1099? To avoid an underpayment penalty, you should continue to pay taxes as you go and not wait until tax time.

Instead of doing it on a by-paycheck basis, you’ll do it with quarterly estimated payments. That means four times a year, you’ll send a tax payment to the IRS and any applicable state and local revenue departments.

Need some help with that? Check out the basics of paying estimated taxes on IRS Form 1040-ES.  For more on financial considerations of receiving nonemployee compensation, review these common problems for gig workers.

Nonemployee compensation and Form 1099-NEC

So, let’s get back to IRS Form 1099-NEC and outline what it reports and what you do with it. Essentially, businesses use this form for payments for services as part of their trade or business. In addition to individuals, a business may file Form 1099-NEC to a partnership, estate, or corporation.

The 1099-NEC only needs to be filed if the business has paid you $600 or more for the year. If you made less than $600, you’ll still need to report your income on your taxes, unless you made under the minimum income to file taxes.

When you get your Form 1099-NEC for your nonemployee compensation, you’ll see that you’ve received Copy B. The business that paid you will send Copy A to the IRS.

On the form itself, you’ll see your personal information and the amounts paid to you. There are also boxes for federal income tax and state tax information, but they will most likely be empty unless you’re subject to back-up withholding.

You’ll use the amount in Box 1 on your Form 1099-NEC to report your self-employment income. Instead of putting this information directly on Form 1040, you’ll report it on Schedule C.

What else should you know about filing taxes with nonemployee compensation?

Another step in the process is to calculate and pay self-employment taxes. As a 1099 independent contractor, your coverage of Social Security and Medicare taxes is paid through these taxes. To determine your self-employment taxes, you’ll use Schedule SE. For the details, find out how self-employment tax works.

Here’s some good news: As an independent contractor, you may be eligible to take the qualified business income deduction. This deduction lets you take a 20% deduction on pass through income (i.e., income from a sole proprietorship, partnership or S corp that is reported on your personal tax return). You can also value from taking other business deductions.

Getting help with Form 1099-NEC

Who knew that being an independent contractor would mean so many changes to your taxes? It’s definitely new territory if you’ve only ever received a Form W-2.

With H&R Block, you can confidently file your 1099-NEC knowing you’ll get your max refund–or you’ll get your money back.

Check out these filing options for independent contractor tax forms:

• H&R Block Online Deluxe for independent contractors with no expenses to deduct.
• H&R Block Online Premium for independent contractors with expenses to deduct.

The post What is Form 1099-NEC for nonemployee compensation? appeared first on H&R Block.

You’ll need to account for all jobs you have and for your spouse if applicable and desired. Plus, you should factor in any additional income, credits, and tax deductions available to you.

This article will address the main steps in how to fill out a W-4 form and how you might fill it out for specific situations. To learn more about the form itself, read our post: “What is a W-4 Tax Form?”

Want to make it easy? Skip the manual process and use our W-4 paycheck tax calculator to get a completed W-4 tax form. You don’t need to know how to fill out a W-4, because we do it for you with the details you provide.

What is a W-4?

Internal Revenue Service (IRS) Form W-4, Employee’s Withholding Certificate, is generally completed at the start of any new job. This form tells your employer how much federal income tax withholding to keep from each paycheck. This form is crucial in determining your balance due or refund each tax season.

How to fill out Internal Revenue Service (IRS) Form W-4 for a job

There are a few nuances when it comes to filling out IRS Form W-4 for a new job. For instance, if you withhold too much, you can end up with a large refund. If you withhold too little, you can create a balance due and potentially an underpayment penalty. Check out our step-by-step process below, which will walk you through how to fill out a W-4 form.

How to fill out W-4s: Step-by-step

Ready to dive into how to fill out your W-4? We’ve got the steps here; plus, important considerations for each step.

Step 1: Enter your personal information

First, you’ll fill out your personal information including your name, address, social security number, and tax filing status. You can choose from Single, Married Filing Separately, Married Filing Jointly, Qualifying Surviving Spouse, or Head of Household.

While you can stop here and allow your employer to simply withhold at default levels, the easiest path may not be the best. To get the right balance between paycheck and your refund, you might need to complete one or more additional steps – especially if you want to avoid additional withholding or surprises when you file.

Step 2: Account for all jobs you and your spouse have

Unlike when you filled out W-4 forms in the past, you’ll have to fill out your W-4 with your combined income in mind, including self-employment. Otherwise, you may set up your withholding at too low a rate.

To fill out this part correctly, you have three choices. You can:

1. Use an online estimator to determine a specific amount to have your employer withhold each pay period. This method works the best if you have income from self-employment, because it helps allow for self-employment taxes in addition to income taxes.
2. Use a worksheet attached to the W-4 form if there are multiple jobs in your household (either you have multiple jobs or you and your spouse each work). Both the online estimator method and worksheet method work well if you’d prefer not to give your employer information about other income you might have. Or,
3. Check a box and have your employer withhold at a default rate. Checking the box works best if all the jobs have a similar amount of pay.

Checking the box for the default method may seem like the easiest choice. But this will sometimes result in a refund check and much smaller paychecks throughout the year. If you are in a good enough financial situation, this may not seem like a big deal. But for some taxpayers, they’d like to maximize their paycheck amount while making sure their tax liability is covered for the year.

Step 3: Claim your children and other dependents

You want to make sure only one of you allows for child-related tax credits through withholding. Generally, it’s best to allow for child-related tax credits on the Form W-4 of the highest paying job. If you and your spouse each allow for child-related tax credits on your W-4, it will likely result in not enough withholding, and having to pay an additional amount to the IRS at the end of the year.

Step 3 of the W-4 form will ask you how many qualifying children you have under age 17, and how many other dependents you have. After you complete Step 3, your employer will know exactly how much to decrease withholding to allow for your children.

This is also where you can reflect any other tax credits as well if you want the amount withheld from your paycheck. See the Internal Revenue Service (IRS) W-4 Form instructions for details.

Step 4: Make other adjustments

Here you can account for other income you receive, deductions you might qualify for and any extra withholding amounts you’d like your employer to take.

• Other income – Amounts added here will increase your withholding
• Deductions – Amounts added here will decrease your withholding
• Extra withholding – Amounts added here will increase your withholding

Just like it’s important for only one spouse to allow for child-related tax credits on their W-4, it’s important that you only allow for other income or deductions on one W-4.

If you expect to itemize deductions instead of claiming the standard deduction, you can also use a deductions worksheet attached to the W-4 form to ask your employer to decrease withholding by a specific amount each pay period.

If you need to claim an exemption from withholding, you can still do that on the new W-4 form. You are exempt from withholding if you owed no federal tax the prior year and you expect to owe no federal tax for the current year. To claim you are exempt, you write “Exempt” on the new W-4 form in the space below Step 4(c).

Step 5: Sign and date your form

The hard part is now done. All that’s left to do is sign and date your form and hand it off to your employer.

How to fill out your W-4 to get more money

As mentioned at the top of this post, your W-4 withholdings affect what’s taken out of your paycheck each period and your potential refund. In fact, they are related in that taking more taxes out of your pay can mean a larger refund—and the inverse can be true.

If you’d like to know how to fill out your W-4 form to get more money, you’ll want to pay close attention to Steps 3 and 4. This can work two ways.

• How to fill out your W-4 to get more money in your paycheck: The easiest way to do this is to add an amount to Step 4c.
• How to fill out your W-4 to get more money back as a refund (or reduce what you might owe): You could reduce the amounts on 4a (other income) or 4c, or increase the number on line 4b (deductions).

When to fill out a new W-4

Additionally, any time you have a major life event you should consider updating your W-4. A marriage, divorce, a new baby, or a child turning 17 will have an effect on your taxes and should be taken into consideration in filling out your W-4.

Let’s take a look at a few real-life situations to outline considerations regarding how to fill out W-4 if those situations apply.

How to fill out a W-4 if you’re married and you both work

As mentioned in the steps above, couples should account for all jobs in their household when they fill out their W-4s. In fact, we recommend that married couples do this at the same time if they are both employed.

Coordination is the key when considering how to fill out your W-4 if you’re married and both of you work. This is because certain factors should only be accounted for on one spouse’s W-4, such as deductions and dependents.

If you try to account for them on both spouse’s forms, you’ll end up withholding too little and could face a hefty tax bill if not penalties at tax time.

What if you’re married, filing jointly and completing your W-4 form? If you file as Married Filing Jointly — and you both earn around the same amount, there’s a box you can check to indicate that (it’s part of line 2c). This can help you not withhold too much in taxes.

How to fill out a W-4 form if you’re a student

Students may wonder how to fill out their W-4, especially if they’re eligible to be claimed by their parents. In general, this comes down to your age and whether you earn enough to file a tax return in the first place. In many cases, you can just fill out step 1 and sign on step 5. Check out our post on summer jobs and withholding, which covers some of these concepts.

How to claim 1 on W-4; How to fill out W-4 claiming 0

Although the Tax Cuts and Jobs Acts of 2017 is a few years behind us, we often still hear clients ask about how to claim 1 on a W-4 or how to fill out their W-4 claiming 0. These concepts have to do with allowances, which no longer apply to W-4s after tax reform. 

Starting with the 2020 Form W-4, you can no longer request an adjustment to your withholding by increasing or decreasing allowances. Instead of using allowances, you will use other parts of the W-4 to tell your employer how much to withhold from your paycheck (as described above).

How to fill out a W-4 form: Getting help

Filling out W-4 Forms can be tricky for some. That’s why we’re here. H&R Block tax professionals can be a great help in this area. In fact, you can get your return reviewed and determine if you over-withheld or under-withheld during the year.

If you determine that a change should be made, you can provide a new W-4 to your employer. You should be able to make these changes at any point during the year; and the sooner the better if a change needs to be made!

Find a tax office near you today!

The post Form W-4: How to fill out a W-4 in 2023 appeared first on H&R Block.

Start a new job and you may hear a lot of talk about a 401(k) as you’re completing the multitude of first-day paperwork. What is a 401(k), you ask? At its core, a 401(k) is a technical name for a retirement investment plan tied to your workplace. To get technical, it’s a type of plan called a “defined contribution plan.”

At a high-level, here’s how it works: You put money into an account that is then invested in stocks, bonds, money market accounts and more. Your employer will work with a company — like Fidelity Investments or Vanguard — to select the mix of investments. This amount of money grows over time, and typically provides a better return than a traditional savings account. Once you retire, you can begin to withdraw funds from the 401(k) to support yourself.

Some common questions about 401(k) plans

Can you open your own 401(k) plan?

As an individual you can’t open up a plan.  401(k) plans are offered – or “sponsored” – by employers, unless you’re a small business owner, and in which that case you can open a solo 401(k).  Employers will often match a certain percentage of the amount you put into the plan (also called your “elective deferral”). Let’s say you send 4% of your salary to your 401(k). It’s possible that your employer may contribute additional money to this retirement account. It could be 1%, 2%, 3% or more. However, employers aren’t required to make this contribution, so the amount will vary widely. People often refer to this as “free money!”

If you’re employer doesn’t offer a 401(k) plan, there are many other defined contribution plans that are similar to them.

Employees at tax-exempt institutions may be able to participate in a 403(b) plan. Government employees could have a 457 plan, and federal civilian employees might have a Thrift Savings Plan. Your employer might offer a Roth 401(k), which is similar. The key difference is that with a Roth 401(k) plan income tax is paid at the time of investment, not when funds are withdrawn during retirement. The taxation of any distribution will depend on whether or not it is “qualified.”

If your employer doesn’t offer any of these plans you can start an individual retirement account (IRA), or Roth IRA. If you’re self-employed you can also start your own solo 401(k) if you have no employees or a SEP IRA if you have employees.

Is 401(k) pre tax?

Yes. The money invested in a 401(k) is deducted from your paycheck before taxes. However, it will be taxed when you withdraw money during retirement. The idea is that your tax rate in retirement will be lower than your current tax rate.

How much can you put in a 401(k)?

As of 2023, the maximum you can defer into your 401(k) is $22,500 per year unless you are age 50 or over. In that case, you can defer up to $30,000.

If you take money out of the account before you are 59.5 years old, you will typically incur a 10% penalty in addition to the regular income taxes you must pay.  So a 401(k) should definitely be considered a long-term savings strategy.

How much will my 401(k) grow?

The growth will depend on several factors, including what you’re invested in, how the markets are doing, and how much you add to your account. However, there is no guaranteed return. .

Have questions about retirement income

If you still have looming questions about taxes and investments, let H&R Block help. Our tax pros know the ins and outs of taxes and are dedicated to making sure you’ve filed with accuracy, so you get the biggest refund possible – guaranteed.

Make an appointment with one of our tax pros today. 

The post What is a 401(k)? appeared first on H&R Block.

That’s because independent contractors have to pay their own income tax and self-employment taxes throughout the year, while employers withhold and cover parts of these taxes for employees.

Millions of workers are surprised every year when they get IRS Form 1099-NEC (before 2020 this was the 1099-MISC) and end up with a tax bill because they haven’t paid enough (or any) taxes on that income. Also, if you don’t pay estimated taxes during the year, you can get hit with an estimated tax penalty. Learn more about estimated tax payment exceptions.

So, it’s important for employers and employees to get the employment relationship right, because the consequences can be expensive. Many times, employers make the decision on a worker’s status. But, it’s a “facts and circumstances” test, and each person’s situation is different.

It’s important to be proactive and have a clear understanding of your status as an employee or independent contractor. Independent contractor misclassification is a common thing, but it can be avoided you simply need to know the rules.

Think you may be a contractor and want to know how that affects your taxes?  Check out our Guide to Gig Worker Taxes.

How to figure out whether you’re an employee or independent contractor

You need to look at three factors. All of them basically boil down to whether you or the business that pays you has more control.

1. Who has the right to control your behavior at work?

The Internal Revenue Service (IRS) is more likely to consider you an employee if:

• The business owner gives you instructions on when and where to work, what tools to use and/or where to purchase supplies and services.
• Instructions from the business are highly detailed.
• Evaluation systems measure how you do the work, rather than just measuring the results.
• The business trains you on how to do the job. It’s even more likely you’re an employee if the training is ongoing and involves procedures and methods.

2. Who has financial control and runs the business aspects of your job?

The IRS is more likely to consider you an employee if:

• You don’t significantly invest in your work equipment.
• You don’t have many unreimbursed work expenses.
• You don’t have the opportunity for profit or loss.
• Your services aren’t available to the market.
• The business guarantees you a regular wage for hourly, weekly, or other periodic work, even if you also get a commission. Independent contractors often charge flat fees for a job.

3. What’s your employment relationship with the business?

The IRS is more likely to consider you an employee if:

• You have a written contract that states you’re an employee (but this alone can’t determine your status).
• You receive employee benefits, such as health insurance, a pension plan, or vacation or sick pay. Companies generally don’t grant these benefits to independent contractors.
• You and the company expect that the relationship will continue indefinitely, rather than for a specific project or period.
• You provide services that are a key activity of the business.

Some of the factors aren’t as clear cut as others. Some may point toward employee status, while others indicate you’re an independent contractor.

The IRS weighs worker status on a case-by-case basis. If you’re unsure about your situation or want a professional opinion, a tax pro can help.

What to do if you think you’re incorrectly classified

If your employer treated you as an independent contractor but you think you’re really an employee, here’s how to file your return:

• You still owe your share of employment taxes, which you should report on your federal tax return using Form 8919, Uncollected Social Security and Medicare Tax on Wage. This form allows you to calculate and report your share of taxes as if you were an employee.
• Next, contest your independent contractor status by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. On Form SS-8, you’ll provide the IRS with the facts to determine whether you’re a victim of employee misclassification.

If you’ve already filed your return without Form 8919, file an amended return (Form 1040X) with a Form 8919. After that, file Form SS-8.

Don’t submit Form SS-8 with your tax return, because it will delay processing. Instead, send the form to the address on the Form SS-8 Instructions.

What happens when you file Form SS-8

The IRS will let you know when it receives your Form SS-8 and will assign a technician to review the employer employee relationship. During its review, the IRS may request more information from you, and will ask your employer for the same information on your Form SS-8. In doing so, the IRS may share some or all the information on your Form SS-8 with your employer.

It can take at least six months to get a determination from the IRS. Once the IRS decides how to classify you, the IRS will send a letter to your employer and a copy to you letting you know about its decision.

If you disagree, you can identify facts from the original submission that you don’t think the IRS fully considered or provide new information and ask that the IRS reconsider the decision.

The results

If the IRS decides you’re an employee, you won’t owe any more taxes after you filed Form 8919 with your return.

If you’re an independent contractor, you’ll owe self-employment taxes and unemployment insurance.

How to get expert help

Worker classification isn’t always clear-cut. If you’re not sure whether your status is correct, talk to a tax professional about your situation. Doing so will allow you to plan and/or avoid an unexpected tax bill.

Or, if you’re an independent contractor who was surprised by a tax bill, the IRS offers several options for people who can’t pay right away. Learn what to do next.

Get started with filing taxes online or with an H&R Block tax pro – we’re here for you.

Check out our Guide to Gig Worker Taxes.

The post How to know if you’re an employee or a contractor – and why it matters appeared first on H&R Block.

But there’s also a teacher tax deduction available to help offset these expenses. Let’s cover the basics on educator expense deductions here so you can maximize your tax deductions as a teacher.

What’s the educator expense tax deduction?

Eligible instructors can qualify for an educator expense tax deduction of up to $300 for tax year 2022. It extends up to $600 if an educator is married to another eligible educator and filing under the status married filing jointly (up to $3000 per person combined).

Common teacher classroom supplies that fit the tax deduction include:

• Books and educational textbooks
• Computer equipment, software, and cloud services
• Industry-specific equipment
• Instructional supplies (like pens, paper, craft goods, etc.)
• Professional development courses related to curriculum or students
• Supplementary materials used in the classroom

Who’s eligible for teacher tax deductions?

Before assessing which teaching supplies fall under the educator expense deduction umbrella, you must first verify if you are what the IRS acknowledges as an “eligible educator.”

An “eligible educator” describes anyone in the following roles for kindergarten through 12th-grade students:

• Teacher
• Classroom instructor
• School counselor
• School principal
• Classroom aide

In addition to the roles listed above, you must spend at least 900 hours within an academic year providing elementary or secondary education as specified under your state’s law.

Unfortunately, the educator expense deduction doesn’t apply to homeschooling instructors, or any college professor or instructor in post-secondary learning environments.

Other limitations of the educator expense deduction

There are a few additional limitations to the educator expense you should be mindful of. In fact, the deduction could be lowered due to a number of factors:

1. You should subtract tax-advantaged funds used for your own personal schooling or professional development courses, such as a Coverdell education savings account from your deduction.
2. The deduction is limited to the sum of your teaching expenses that is greater than the interest earned on Series EE or U.S. savings bonds if you’ve excluded this interest from your taxable income because it was used to pay for qualified higher education expenses.

Where to claim the educator expense deduction

If you have determined you’re eligible to claim the educator expense deduction, do so on one of the following tax forms:

• Form 1040 (The standard federal tax return), Schedule 1
• Form 1040-SR (The federal tax return for seniors), Schedule 1
• Form 1040-NR (The federal tax return for expat teachers)

Help with tax breaks for teachers–and other deductions

Claiming tax deductions can get complicated. If you need help, we’re here for you. If you have other questions about tax breaks for teachers—such deductible 403(b) Plan contributions —find out how you can work with one of our tax pros! With many ways to file your taxes, Block has your back.

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First things first – independent contractor taxes are different than when you’re a W-2 employee. With independent contractor work (sometimes called gig work or self-employment), our clients will ask “why was no federal income tax taken out of my paycheck?”

This is not a mistake. As an independent contractor, you’re required to pay your federal and state (if applicable) taxes to the Internal Revenue Service (IRS) and state revenue departments on your own, so they are not withheld from your paycheck. Wondering how you’re supposed to figure that all out? Rest easy; we’ve got you covered. 

In this post, we’ll touch on the difference between independent contractors and employees. Plus, we’ll cover important elements of independent contractor taxes, such as self-employment tax, quarterly estimated tax payments, and independent contractor tax deductions.

Working as an independent contractor after a job loss? Be sure to visit our  Unemployment Resource Center for helpful articles and information.

How do you know if you’re an independent contractor and not an employee? It has to do with whether you or the business that pays you has more control over the details of your work. Consider these questions: Who has the right to control your behavior at work and the financial aspects of your job—or is that something the company decides for you? If you’re not sure, review our post on how to know if you’re an employee or independent contractor. 

What if you work as an employee AND an independent contractor? These additional tax responsibilities will generally still apply, so don’t stop reading just yet. You’ll thank yourself when it comes time to file.

Independent contractor taxes: Important concepts

Don’t wait until tax time to find out about your tax responsibilities and considerations. The more you can plan for these items, the easier it will be on you to file your tax return. Plus, you could also save yourself from a larger than expected tax bill.

• Self-employment tax – This is how you cover Social Security and Medicare taxes for yourself. In an employee-employer situation both parties pay a portion of these taxes. Since you’re self-employed, you’re responsible for both halves. You’ll actually get to deduct one half of the taxes which is equivalent to the employer portion when you file your tax return. To look at the numbers, read our post on self-employment tax (SE tax).
• Quarterly estimated taxes – Again an employee-employer comparison is helpful here. Employers typically withhold taxes from employee paychecks each pay period, so taxes are paid as the year goes on. As a self-employed person, you’ll pay estimated taxes as you go too – just on set dates four times a year. Here’s where you can find those estimated tax payment dates. Estimated taxes include both income and self-employment taxes.
• Independent contractor tax deductions – This will largely depend on what you do for a living. For example, a freelance web designer may not have any mileage expenses, but they could have home-office expenses to deduct. Review the examples in the independent contractor deduction list below to see what types of tax benefits may apply to you.
• Tax deductions for self-employed individuals
  • Deduction for one half of self-employment tax
  • Self-employed health insurance deduction
  • Qualified Business Income Deduction
  • Car and driving related deductions – Mileage or actual expenses
  • Home-office deduction
  • Internet and phone
  • Licensing and fees
  • Advertising

Wondering what other independent contractor tax deductions you can claim? Whether you work with a tax pro or choose H&R Block Online, we’ll help you determine the tax credits and deductions that apply to you. 

How to file taxes as an independent contractor

To complete your taxes, you’ll need to gather all your forms and use them to complete certain forms on your return.

Common tax forms you could receive – Depending on your job type, you may receive a 1099-K or a 1099-NEC (before tax year 2020, you would have received a 1099-MISC).  You’ll need to report information from these forms on your individual tax return.

Note: Businesses are now required to send you a 1099-K if you were paid more than $600 for goods or services. Generally, even if they don’t happen to send you the forms, you still need to report the income to the IRS.

Forms you may need for filing – If you are filing taxes as an independent contractor, you are considered to be self-employed – even if you didn’t formally start your own business. As a proprietor of that business, you should file your independent contractor taxes on a Schedule C (Form 1040) to properly report your income and claim related expenses.

To calculate the self-employment taxes mentioned above, you’ll use Schedule SE. You’ll need to file Schedule SE if you have at least $400 in net income from self-employment.

If you have a business entity other than a sole proprietorship or a single member LLC, you’ll need to file a business return instead of reporting your business income on Schedule C. Examples include partnerships (Form 1065) and S corporations (Form 1120S).

There may be other IRS forms you’ll need to file, depending on the deductions you take.

Are there tax nuances for direct sales distributors?

No, if you are an independent consultant or distributor for a direct sales or multi-level marketing company you are also required to report your income on Schedule C (Form 1040). As explained earlier, if you have net profits of at least $400 you’ll also need to file Schedule SE.

Schedule C is used to report your net income from self-employment. Net profit from the activity is subject to the 15.3% self-employment tax you report on Schedule SE, which functions in a similar manner as Medicare and Social Security taxes employees would have withheld from your wages.

Getting help with independent contractor taxes

We know independent contractor and direct sales taxes can be tricky. But with H&R Block on your side, you can feel confident as you file your taxes.  

Ready to file? Take control of your taxes and get every credit and deduction you deserve. File with:

• H&R Block Online Deluxe (if you have no expenses) or
• H&R Block Online Premium (if you have expenses).

The post Filing taxes as an independent contractor appeared first on H&R Block.

Being self-employed affects your taxes in several ways compared to workers who are considered employees. One big difference is in the deductions you can take. For example, the self-employed health insurance deduction allows independent contractors and other self-employed individuals to deduct the health insurance premiums they pay. 

This is one deduction you don’t want to miss on your taxes. If you’re a self-employed person, you may deduct up to 100% of the health insurance premiums you paid during the year. To take the deduction, you must meet certain criteria.  We’ll go over those rules in this post and explain how you can deduct them on your return.

Do you need more help with self-employed health insurance and how it affects your taxes?  Check out our Guide to Gig Worker Taxes.

Are health insurance premiums tax deductible?

Yes, they are deductible if you have qualifying insurance and if you’re an eligible self-employed individual. Qualifying health insurance includes medical insurance, qualifying long-term care coverage and all Medicare premiums (Parts A, B, C and D).

Note for prior tax years: If you didn’t include Medicare premiums (or other insurance premiums) on a prior year’s return, you can file an amended return to claim or increase your deduction for self-employed health insurance for that year. 

Who is eligible for the self-employed health insurance deduction?

Your health insurance premiums are tax deductible if you have a net profit reported on Schedule C or F. You are also eligible if you’re a general partner, a limited partner receiving guaranteed payments, or a shareholder owning more than 2% of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2. 

Whose coverage can you include in your self-employed health insurance deduction? You can include premiums paid for yourself, your spouse, dependents and any nondependent child under age 27 at the end of the year.

Who is not eligible for the self-employed health insurance deduction?

If you’re have access to participate in an employer-sponsored subsidized health plan, you won’t be eligible for this deduction. The employer in this case could be someone you or your spouse works for. If the plan is sponsored by either employer, it means your health insurance premiums aren’t tax deductible.  (Note: A subsidized plan is one where the employer pays a portion of the premium.)

Generally, this prevents a person who is both an employee and self-employed from claiming the self-employed health insurance deduction.

What if you had access to an employer plan for part of the year?  This deduction is applied on a month-to-month basis, so, you would only be disqualified from claiming the deduction for the part of the year that you had employer plan coverage.

What if you didn’t have access to both health care and long-term health care coverage?  You can apply this rule separately to policies that include long-term health care coverage and those that do not.

How to deduct health insurance premiums for the self employed

You can claim the self-employed health insurance deduction as an adjustment to your gross income on Schedule 1 of Form 1040. You can claim this deduction regardless if you choose to claim the standard deduction or itemize your deductions.

Getting help with claiming the self-employed health insurance deduction

We know taxes for independent contractors can be tricky. But we’re on your side, you can feel confident filing your taxes.

Have a side business?  Take control of your taxes and get every credit and deduction you deserve. File with H&R Block Online Deluxe (if you have no expenses) or H&R Block Online Premium (if you have expenses).

Have questions about self-employment taxes and other small business tax issues? Rely on our team of small business certified tax pros to get your taxes right and keep your business on track. Find out how Block Advisors can help with your small business taxes.

Our small business tax professional certification is awarded by Block Advisors, a part of H&R Block, based upon successful completion of proprietary training. Our Block Advisors small business services are available at participating Block Advisors and H&R Block offices nationwide.

The post What is the self-employed health insurance deduction? appeared first on H&R Block.

But when you learn that a chunk of your paycheck went to payroll tax, you’re probably wondering: “What is payroll tax?” This article will discuss IRS payroll tax, including who pays, how payments are made, and how much to pay.

What is payroll tax?

Payroll tax is withheld from employees’ wages by their employer. Payroll tax includes three main components:

• Federal income tax withholding
• The employee’s portion of Medicare tax
• The employee’s portion of Social Security tax

How does payroll tax work?

Payroll tax is taken out of an employee’s earnings. Employers then send the withheld taxes along with their portion of Social Security and Medicare taxes when they deposit taxes.

As an individual tax filer, you don’t have to manually pay in payroll tax from each paycheck. Your employer will do this for you.

How much is payroll tax?

Federal income tax withholding can be 0% or higher depending on your W-4 withholdings. (You can use our W-4 calculator to determine withholding amounts.)

Social Security and Medicare is 7.65% for the employee portion withheld from their gross pay and the employer also pays 7.65% for their portion when they deposit the employee’s portion (6.2% is Social Security and 1.45% is Medicare.)

The total Social Security tax rate is 12.4%. If you are an employee, you are only responsible for paying 6.2% of your paycheck and your employer pays the other half. If you are self-employed, you are responsible for the full amount.

What are wage limits for payroll tax?

For earnings in 2022, this wage base limit is $147,000. So, if you earn that amount with one employer, your payroll taxes cap at that amount. If you have more than one employer and you earn more than that amount, you’ll claim an adjustment of any overpaid Social Security taxes on your return.

There is no wage-based limit for Medicare tax. All covered wages are subject to Medicare tax. But, if you receive wages over $200,000 a year ($250,000 for married filing jointly, $125,000 for married filing separately), your employer must withhold a .9% additional Medicare tax. This will apply to the wages over the threshold. This is on top of the 1.45% employer tax rate.

Need more tax help with IRS payroll tax?

Whether you need help figuring out your withholding for IRS payroll tax, or you are looking for tax guidance as a small business, we can help! With multiple ways to file your taxes, we make sure your tax outcome is optimized, earning you every tax credit and deduction you are entitled to.

The post What is payroll tax? appeared first on H&R Block.

In this post, we cover three key self-employment tax deductions that any solopreneur or small business owner should know about.

3 top self-employment tax deductions

Self-employment tax deduction

You can deduct part of the self-employment tax you paid as an adjustment to income. So, you can claim the deduction even if you don’t itemize deductions. Claim the deduction on Form 1040 as an adjustment to your gross income.

Self-employed health insurance deduction

The Small Business Jobs Act of 2010 created a new deduction. This applies to health insurance premiums paid by self-employed individuals. If you’re self-employed, you can deduct 100% of health insurance costs as an adjustment to your income for these people:

• Yourself
• Your spouse
• Your dependents
• Your children under age 27 at the end of the tax year

Claim the health insurance deduction as an above-the-line deduction on Form 1040, Line 29.

You can’t claim a deduction for any month that you qualify to participate in a health plan offered by either:

• Your employer
• Your spouse’s employer

Self-employment retirement deductions

You can deduct your contributions to a retirement plan as an adjustment to income. Plans include:

• SEPs
• SIMPLEs
• Qualified plan — defined-contribution plan or defined-benefit plan

SEPs

SEPs are one option for funding future retirement benefits for you and your employees. You can set up an IRA designated as a SEP-IRA at a financial institution of your choice.

You’ll own and control the SEP-IRA. However, you’ll make the contributions directly to the financial institution. You can then deduct allowable contributions as an adjustment to your gross income. With a SEP, your contribution each year is optional. Matching contributions aren’t required or allowed.

Setting up a SEP

You must have a written agreement that conforms to IRS requirements. You can use the IRS model-SEP agreement, Form 5305-SEP. This agreement must include a written allocation formula for your contributions.

If you use Form 5305-SEP, IRS approval isn’t required. However, keep the original agreement in your records. You can establish the plan at any time up to the due date of your return, including extensions.

You must also notify each of your eligible employees that they can participate in the plan. You can use Form 5305-SEP to notify employees. You haven’t adopted the plan until each employee receives this notice.

A SEP-IRA account must be set up by or for each eligible employee. The accounts can be set up through any of these:

• Banks
• Insurance companies
• Other financial institutions that offer IRA accounts

SEP contributions

You can make contributions to a SEP at any time up to the due date of your return, including extensions. The amount of allowable contributions is based on the formula described in the plan. It can’t discriminate in favor of:

• Highly compensated employees
• The self-employed owner

The contribution for 2023 is limited to the lesser of:

• $53,000
• 25% of each employee’s compensation

This also applies to your own contribution. Compensation more than $265,000 for 2023 can’t be used for contribution purposes. This compensation is your net self-employment income minus both of these:

• The deductible part of the self-employment tax you paid
• Deduction for contributions to your own SEP-IRA

You must adjust your self-employment income by the contribution you’re making for yourself. So, this part of the computation uses a reduced contribution rate. You can find the rate table for self-employed individuals in Publication 560. If your plan uses a 25% contribution rate, the rate for you as a self-employed person will be 20%.

SEP deductions

You can deduct contributions you make to a SEP-IRA for your employees up to the deduction limit. You’ll make the deduction on Schedule C. As a self-employed taxpayer, you deduct the amounts you contribute to your own SEP-IRA, up to the maximum allowed.

SIMPLE plans

A SIMPLE plan is a type of retirement plan. It’s available to employers or self-employed taxpayers who don’t have a qualified retirement plan. You can set up a SIMPLE plan if you have 100 or fewer employees. They must have received $5,000 or more in compensation for the prior year.

A SIMPLE can be set up as a SIMPLE IRA or a SIMPLE 401(k). If the plan is set up as an IRA, a separate SIMPLE IRA account is set up at a financial institution for each eligible employee. A SIMPLE set up as a 401(k) is considered a qualified plan. However, it’s not subject to the nondiscrimination and top-heavy rules that regular 401(k) plans have.

To learn more, see Publication 560: Retirement Plans for Small Business at www.irs.gov.

Employers who sponsor a SIMPLE IRA plan must match or make a required contribution each year. This isn’t true for a SEP or qualified plan.

Also, SIMPLE plans don’t limit deductible contributions to a percentage of compensation. SEP or qualified plans do limit them.

Setting up a SIMPLE IRA plan

You must have a written agreement that conforms to IRS requirements. You can use:

• IRS-template forms — Form 5305-SIMPLE or Form 5304-SIMPLE
• Prototype plan available from a bank or an insurance company authorized to sponsor SIMPLE IRA plans

Figure out which IRS form you’ll need to use:

• If you’ll require one institution to maintain all accounts, use Form 5305-SIMPLE.
• If you’ll allow each employee to choose the financial institution to maintain his or her account, use Form 5304-SIMPLE.

Like with the SEP plan, you don’t need to file the form with the IRS. The form must be completed, signed, and maintained in your records.

You must set up a SIMPLE plan by Oct. 1 of the year the plan becomes effective. If you form a new business after Oct. 1, you must set up a plan as soon as possible to become effective for that year.

SIMPLE contributions

The maximum employee contribution to a SIMPLE is $12,500 for 2023. You must make matching contributions by your return’s due date, including extensions.

You must match 1% to 3% of the employee’s compensation. The matching contribution percentage paid by you also applies to your own contribution.

Qualified plans

There are two types of qualified plans:

• Defined-contribution plans
• Defined-benefit plans

Defined-contribution plans include:

• Profit-sharing plans — This plan doesn’t require you to make contributions each year or with fixed amounts. However, the plan must provide a definite formula for these:
  • Allocating the contribution among the participants
  • Distributing the accumulated funds to employees:
    • After they reach a certain age
    • After a fixed number of years
    • Upon certain other occurrences

Employers often establish profit-sharing plans to offer a 401(k) plan to employees.

• Money purchase pension plans — This plan requires you to make contributions based on a fixed formula. You’re required to make contributions to a money-purchase pension each year. So, they aren’t used very frequently.

A defined-benefit plan is any plan that isn’t a defined-contribution plan. An employer usually gets professional help for a defined-benefit plan since:

• Contributions must be set up to provide definite benefits to the plan participants.
• The plan usually requires actuarial assumptions and computations.

Setting up a qualified plan

After you adopt a written plan, you must notify your employees. You can use an IRS-approved template or prototype plan document to set up your plan. You can usually get such a document at:

• Banks
• Insurance companies
• Mutual-fund companies

You can also design a plan to meet your individual needs. The plan must provide a formula for both of these:

• Allocating contributions among participants
• Making distributions upon retirement or certain other events

Qualified plan contributions and deductions

The amount you can contribute and deduct varies, depending upon the type of plan.

Contributions to a defined-benefit plan usually can’t be more than the lesser of these:

• $210,000
• 100% of a participant’s average compensation for his or her highest three consecutive calendar years

Contributions to a defined-contribution plan can’t be more than the lesser of these:

• $53,000
• 100% of the participant’s compensation

Form 5500

A plan administrator or employer who maintains a qualified plan or a SIMPLE 401(k) must file one of these forms each year:

• Form 5500
• Form 5500-SF
• Form 5500-EZ

SEPs and SIMPLEs set up as IRAs are usually not required to file this form.

To learn more about the requirements for each form, see Publication 560: Retirement Plans for Small Business at www.irs.gov.

Get help with small business tax deductions

Have a side business?  Take control of your taxes and get every credit and deduction you deserve. File with H&R Block Online Deluxe (if you have no expenses) or H&R Block Online Premium (if you have expenses).

Have questions about deductions and other small business tax issues? Rely on our team of small business certified tax pros to get your taxes right and keep your business on track. Find out how Block Advisors can help with your small business taxes.

 Our small business tax professional certification is awarded by Block Advisors, a part of H&R Block, based upon successful completion of proprietary training. Our Block Advisors small business services are available at participating Block Advisors and H&R Block offices nationwide.

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