Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses the most common tax forms every taxpayer should know about.
Tax Form 1040 or 1040-X
The well-known U.S. Individual Income Tax Return, Form 1040 is what you will use to report both your income and deductions to determine your tax liability every tax year. Form 1040-X, Amended U.S. Individual Income Tax Return, allows taxpayers to correct a previously submitted 1040, make specific elections after the tax deadline, or change an amount adjusted by the IRS.
Tax Form W-2
If you’ve ever earned money from an employer, you have probably received a W-2, Wage and Tax Statement. This critical document for wage earners includes your income earned in the previous year, as well as taxes withheld, and helps you file your federal and state tax returns. It may also include any benefits you received through your employer. If you changed jobs mid-year, worked more than one job as an employee, or if your employer was acquired by another company mid-year, you may receive multiple W-2s.
Tax Form 1099-NEC
A 1099-NEC will report your income earned as a freelancer or independent contractor. Businesses will distribute this form if they make payments to you totaling $600 or more. Non-employee income can also include fees, benefits, commissions, and other sources of income paid to you.
Tax Form W-4
Whenever you begin employment with a new employer, you will fill out a W-4, Employee’s Withholding Certificate. This form basically tells your employer how much taxes to withhold from your paycheck. Withholding too little can result in a big tax bill, while withholding too much can result in smaller than necessary paychecks. That said, it’s important to ensure that your withholding is always correct.
Tax Form W-9
Form W-9, Request for Taxpayer Identification Number and Certification, helps verify your tax information so your employer, or other paying entity, can report your earnings to the IRS. This form is for both employees and self-employed individuals.
Don’t miss next week’s episode where Phil will discuss private collection agencies. See you next Friday!
Filing taxes when you are self-employed can be very complex. There are plenty of factors involved, from figuring out how much you earned to adding up your business expenses. One of the ways you can better prepare yourself for the filing season is to ensure you have all the correct and relevant tax forms.
Most people will be familiar with Form 1040 since it’s the one that taxpayers submit to report their taxable income. Using your gross income and the credits and deductions you can claim, the form helps calculate the amount of tax you owe or the refund you will receive. Typically, an individual will be required to file Form 1040 if they meet certain gross income thresholds according to their filing status and age. For example, single filers under age 65 are required to file Form 1040 for 2022 if their gross income was at least $12,950. However, self-employed individuals follow different filing requirements. If you are self-employed and have net earnings of at least $400, you must file an income tax return.
A Schedule C, also known as a Business Profit and Loss Form, helps anyone with self-employed income report their gross business income and expenses. Self-employed income is basically all sources of income that do not come from a W-2. Income from your small business, gig work, or side hustles should be reported with a Schedule C, typically one form for every individual business activity you are involved in, unless they fall into the same category. For example, if you have an Etsy shop and deliver for both Uber Eats and DoorDash, you’ll likely fill out two Schedule C forms, one for your Etsy shop and one for both driving services.
While most of the categories on Schedule C are self-explanatory, some can be quite difficult to calculate. You probably received at least one 1099 if you collected payment for your self-employed work. You can use these to add up your income. You’ll be able to deduct any returns or refunds given during the year, auto expenses if you use your vehicle for business use, and the cost of goods sold. Calculating your expenses can be the trickiest part of filing for self-employed taxpayers, so it’s probably best to discuss this with a qualified tax preparer.
Form 4562 is used to depreciate or amortize your business assets. This can include buildings, machinery, equipment, vehicles, and patents. You may not depreciate land. Taxpayers must file a separate Form 4562 for each depreciation or amortization deduction being claimed.
If you plan to deduct your home office expenses, you’ll need to file Form 8829, Expenses for Business Use of Your Home. Remember you can only claim the home office deduction for areas in your home used exclusively for business and if it is your principal place of business. Typical deductions include insurance, rent, utilities, repairs and maintenance, home depreciation, deductible mortgage interest. However, you may only deduct the portion that is used for business use only. For example, if you use 15% of your home’s square footage exclusively for business use, you may deduct 15% of your home expenses for a business deduction.
Schedule SE is used to calculate your self-employment taxes to determine your Social Security benefits. You’ll only need to file a single Schedule SE, even if you have multiple businesses. You would simply combine your net earnings on a single form. However, married couples filing jointly who both earn self-employed income should file separate Schedule SE forms.
Tax Relief for Self-Employed Individuals
Filing taxes when self-employed can be very complicated, especially if done on your own. Because there are several business expenses that can be exaggerated, the IRS typically takes a closer look at deductions claimed by self-employed individuals, leading to more audits. It may be best to seek the help of a credible tax preparer or professional to look at your tax situation. Give Optima a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals.