In most cases, the self-employed are required to file taxes annually and pay estimated tax each quarter. As the self-employed do not have their income withheld by an employer, they need to file and pay the self-employment tax (SE tax) along with income tax. The self employment tax covers Social Security and Medicare taxes. To calculate these taxes, you may use Schedule SE on Form 1040.
For filing your annual tax return, you can use either Schedule C or Schedule C-EZ. If you have a small business and generally have expenses of $5,000 or less, you can use Schedule C-EZ. On the other hand, if you run a larger business and have more than $5,000 in expenses, you should use Schedule C.
Deductions for the self-employed can use to reduce their tax bill include:
Premium of Health Insurance: If you pay health insurance premiums for yourself, your spouse or dependent(s), then you may deduct the cost of the premiums from your income.
Home Office Deduction: Because many self-employed individuals use their home as an office, they are allowed to deduct expenses for the business use of their home. The IRS has recently relaxed the eligibility criteria and made it possible for many more self-employed individuals to use the home office deduction. If you have no other fixed location of work and you use your home for administration and/or management of your business, then you can claim the home office deduction.
Equipment costs: You can deduct the cost of the purchase of office equipments such as computers, office furniture and furnishings, etc. It is best to deduct the cost in the same year in which you make the purchases. Expenses made for travel, business parties and lunches are also deductible, but they must be made for business purposes.
For any purchases you make for your business, remember to ask for the bill and keep the receipt in a safe place for your records.