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Self Employment Taxes and Minors.
Hello, my name is Brandon Spiegel, and I am the owner of Let’s Start A Coin Collection, and author of “Let’s Start A Coin Collections Perfect Pocket Sized Book of Coins”. Currently, I am 17 years old, and you may be in the same situation that I was in a few months ago. In the process of starting my business, everything was going good until Bam; I realized that I have to pay taxes, and unfortunately the majority of the articles that were out there and did discuss self-employment and taxes, specifically related to minors. This article provides tax tips and resources I hope that you find to be useful that I figured out while starting my business. Please use this advice only as a recommendation, because I am not a tax expert by any means!
Key Advice to Researching Taxes for Minors
To start, here are a couple of research tips that will likely help you yield better search results when researching taxes.
1) Most articles discussing self-employment taxes do not specifically discuss minors because self-employed minors are taxed like adults.
2) Oftentimes when articles discuss specific tax situations, the scenarios are usually either independent contractors or people who provide lawn care services
The basic legal structure of your company is very important, because it determines how much taxes you have to pay and what forms you have to fill out. There are multiple types of basic legal structures, such as sole proprietorship's, partnerships, S Corporations, C Corporations, LLCs, and single member LLCs. Most businesses, if owned by one person has a legal status as a sole proprietor, and a partnership if owned by two or more people. This article is from the perspective of a sole proprietorship, because that is the legal set up of my company. I do not know a lot about the other legal structures, but I do know that corporations are much more complex than proprietorship's as most corporations have to hire people to help them with taxes.
Federal Taxes and EIN Numbers
There are four main areas where you may have to pay taxes which, includes: federal, state, county, and city.
First federal taxes are going to be discussed, with state and local taxes being discussed towards the end of this article. To start, here is a link to a webpage form the IRS that discusses the different business taxes that one may have to pay to the federal government.
In order to file, and pay business taxes you have to have an EIN number which stands for Employer Identification Number. Despite its name, you have to have it EVEN IF YOU ARE THE ONLY PERSON RUNNING THE BUSINESS! The application for an EIN number can be found on the IRS website, and will pop up if you google “file for an EIN number IRS”.
There are two very important things that I do want to make note of in this article about EIN numbers.
First, DO NOT Pay someone else to file this number for you! Currently, on Legal Zoom it costs at least $79 to file for an EIN number; a very bad option in my opinion! This is because the application from the government is very quick and easy, can be easily found online, and literally takes about five minutes to complete! Various companies can get away with filing for EIN numbers for others, because on the application there is a box that you can click to say that you are applying on behalf of a third party.
Also, EIN numbers are called multiple other things such as a federal tax id numbers.
Self employed People That Have to Pay Taxes.
Almost every self-employed person has to pay taxes! In specifics there are various, income thresholds, where if you make more than this threshold in a year than you have to pay taxes; which varies from tax to tax. To provide an example, for 2016, if you make at least $400 in net profit than you have to pay income taxes. If you have made at least $600 in net profits than you have to pay Self-employment taxes, and you usually have to pay estimated taxes if you make $1000 or more in net profit a year! A very, very important thing to keep in mind is that on average, taxes take away about 30% of your net profit, and the thresholds discussed are for income made before taxes are paid.
Deductions for Self-Employed Minors
Deductions for self-employed persons are filled out in the Schedule C which will be added to your 1040 that is due in April. There are two types of deductions, regular and itemized. Regular deductions are what the name implies, standard. I do want to note that standard deductions are usually going to be less for minors, because we are usually clamed as dependents on our parents’ tax returns. Itemized deductions are based on business expenses, as almost every business expense can be deducted!
A tax audit is where the government watches your taxes on your tax returns,
The IRS issues audits for three different reasons, one is simply by random selection, another is because documents may not match, and a third reason if they find some sort of issue between you and another tax paper. Even though it seems easy to receive a tax audit, very few people receive them, and receiving one is a big deal, so make sure that you keep a good record of all of your expenses and sales and you should be fine!
The link and video below explains more
You have to pay excise taxes if you are you use large equipment, or stuff that may be dangerous. Please check out the link below to learn more.
Self Employment Taxes
This tax is a combination of Medicare, and Social Security taxes, and usually takes up about 15.3% of your net profit because you are taxed as the employer and the employee!
The link below should help explain these taxes further.
Basic Forms to Fill Out, and their Purposes
There are quite a few forms that one may have to fill out, and vary depending on your legal structure and business type.
One resource that I found to be very useful to help me determine the due dates for the various federal tax forms is the IRS tax calendar, the link to it is located below.
Here are a list of some of the most common tax forms that self employed people have to fill out, and their basic purposes.
Schedule 1040SE – This is the form that is used when filing self-employment taxes.
Form 1040ES – This is the form that is used when filing estimated taxes.
Schedule C- This is the form that is used when filing deductions.
Form 1040 - The general tax return that is due in April each year.
Form W9 – This is the most common tax form that is used for tax identification for US residents.
An important thing that I want to make note of is that oftentimes large companies such as Amazon, and Uber issue forms that may not be applicable to your specific business, but is applicable for their company such as form 1099-k.
Local and State Tax and Legal Obligations
I do want to note that local and state legal obligations vary a lot! Despite this, there are some generalizations that can be made. To start, most states collect sales taxes, and so do many counties and cities. For the state and local level there are things that have to be looked into. For state taxes, you need to look into the local sales tax rate, if applicable, and if there are any tax exemptions for purchases made for your business. Also, some states require a business permit to do business, which needs to be looked into as well. For the local level, you need to look to see if there are taxes issued by your county and city, and if you have to have a Do Business As (DBA) to do business in your county or city.
As some people say, taxes and death are the only two things that can be guaranteed =). I really hope that this article helps to clear some confusion that you may about business taxes, and good luck on your business venture, or assignment. Have a great day!
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A book that you may find to be useful.
© 2016 Brandon Spiegel