, How Taxes Work For Self-Employed Individuals

How Taxes Work For Self-Employed Individuals

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  • Post published:June 24, 2021
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Income Tax Return 

Most UK taxpayers are familiar with their annual income tax returns and the tax calculation process. However, many of us aren’t so familiar with how UK tax rules and regulations actually work when you’re self-employed. Self-employed individuals are subject to several different laws that affect their tax obligations. Whether you’re a sole proprietor, a partnership, or an LLC, there are differences between your status as a taxpayer versus your status as an employer. Knowing how taxes work for self-employed individuals can help you maximize your tax return and reduce the amount of tax you need to pay each year.

Payroll Deductions

Self-employed individuals can choose to use any financial institution that offers a debit card or savings account. If you choose a bank, your account can be funded by direct deposit, an automatic savings plan, or through payroll deductions taken directly from your paycheck. These methods of receiving money directly from your paycheck typically require you to pay taxes on the money you withdraw. The rate of tax varies by the method of receiving funds. If you choose to use a bank, be prepared to pay a transaction fee and a minimum withdrawal amount. If you choose a savings account, be prepared to have your contributions deducted before tax time.

, How Taxes Work For Self-Employed Individuals

Annual Income Statement

You may be able to deduct your interest on mortgages and credit cards used for purchasing certain assets, such as boats and cars. Real estate investments are not considered income, and cannot be deducted as long as they are used solely for pleasure (e.g., vacation homes). If you have a business that generates a profit, you may also be able to deduct your business expenses, including travel, insurance premiums, and other miscellaneous receipts, from your annual income statement. Be sure to keep records of all of your receipts and tax statements, including copies of canceled checks that were written to you.

Tax Credits

There are many deductions you can make when it comes to taxes. Some of these include education credits, health care expenses that qualify as an advance payment for coverage under Medicare, state and local tax credits, interest paid on student loans, and tax credits for buying energy efficient appliances. Self-employed individuals can take advantage of tax credits that provide cash refunds or credit the amount of taxes paid for qualifying for unemployment insurance. Tax credits can also be availed of when filing your federal and state income tax returns and for filing joint tax.

Online Tax Filing Options

How taxes work for self-employed individuals becomes more clear once you look at online tax filing options. The Internet allows you to file your taxes immediately after filing your original return. If you are using paper tax forms, be sure to print out your tax forms, including your refund, in a safety file. Also, make sure to keep your refund in a secure location, such as in a fireproof safe. To save time when filing online, you can check with your tax preparer for tips and hints about online tax preparation.

, How Taxes Work For Self-Employed Individuals

Local Tax Rates

When you are finished filling your tax information, the IRS will send you a notice of your tax situation. In many cases, this is where you will find out how much money you owe the government, how much you owe the state, and how much you will owe in property taxes, sales tax, and other local tax rates. If you owe money in some form to the government, the notice will let you know how much you are owed and will explain how you should go about collecting that debt.

Payroll Tax

Self-employed individuals must pay taxes according to their tax rate, which is also determined by their adjusted gross income (AGI). AGI is derived from a physical appearance based on your net earnings from work performed before being self-employed. Self-employed individuals may not owe direct income tax, but they may be liable for payroll tax, property tax, sales tax, and other types of indirect tax rates. These amounts can be very different from your AGI, and if you do not pay your share, your tax rate can be higher.

, How Taxes Work For Self-Employed Individuals

Certified Public Accountant 

There are ways that you can reduce your tax obligation after April 1st, such as by adjusting your AGI or taking any necessary deductions. Before you file your tax return, it’s a good idea to contact a certified public accountant to get some advice about how the tax system works. A certified public accountant can help you make sure you have the right tax rates and can help you understand how tax laws affect your finances.

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