Self employment is the situation of operating for oneself and not for an employer. In most cases, tax authorities would see a self-employed individual as self-employed even if the individual decides to be officially recognised as such, by declaring themselves as business owners, sole proprietors or partnership members. In Canada, for example, there are some specific tax rules applicable to this situation. They are described as follows: “operated for profit”, “operated on behalf of a business”, “income”, and “enterprise”. The key thing to remember in this instance is that self-employment does not include situations where an employee is directly paid by the company they work for (as in the case of benefits and insurance) or with an unincorporated third party that functions as their employer (for example in the case of a contractor).
Self-employed individuals are also subject to taxation on their income and on their yearly net profits. These two categories together bring us to one of the biggest questions asked by taxpayers: “How much do I pay in taxes?” Although it depends on the tax authority, generally, the answers are relatively static because most jurisdictions apply basic rates of taxation to all income earners, regardless of whether they are self-employed or not. A common answer to this question is that the amount you pay in taxes depends largely on your personal lifestyle, the quality of your work, your investments and so on. It is possible, though unlikely, to live an entirely tax-free existence, although it would require extremely hard work and a considerable amount of savings and probably not be worth doing.
One area where a self-employed individual can benefit from lower taxes is in calculating their business tax return. Generally, a business tax return is calculated on an annual basis. A self employed individual’s tax bill will be lower if they have one or more employees, since the company tax liability is reduced by the amount the employee earns as compensation, less any dependents are included on that salary and so on. In order to take advantage of this reduction in business tax liability a self employed individual should include the business assets of the business on their personal income tax return, and those losses incurred during the year should be offset against the net income of the business. Similarly, self-employed individuals should include any depreciated assets on their personal income tax return to reduce the liability.
When discussing the financial aspects of being a self-employed professional, one of the most important things that many people don’t think about is what they will have to pay out for insurance cover. Many self-employed people are either unaware of existing insurance covers, or they think that their chosen career means they can get away without purchasing an adequate insurance policy. If you are self-employed and you decide to provide a service as a freelancer, you will need to buy a policy that provides coverage for your physical and mental condition while working, and whilst performing work-related tasks. You may also need to take out other policies like accident coverage and liability insurance to protect your business against claims by customers, clients or employees.
The Health Insurance Premium: If you are self employed and are starting a new business, you may be eligible for Health Insurance Premium assistance, otherwise known as COBRA. COBRA is a federal law which provides for affordable health insurance premiums for self-employed individuals. If you are self-employed and you do not have access to Health Insurance Premium assistance, you should look into signing up for Medicare. If you do decide to get a Medicare Supplement, keep in mind that it is possible to convert it to HMO, PPO or POS plans. If you have questions concerning Health Insurance Premium assistance, it is always wise to talk with a qualified agent.
There are many other areas that need to be addressed when it comes to tax issues and dealing with the IRS. If you are working as an independent contractor, for instance, you can easily deduct your costs for travel, meals and other miscellaneous expenses from your tax returns. Many times, the SSA will waive the portion of your income taxes that are attributable to this type of situation. If you are self employed and want more help, feel free to contact us for a consultation.