While no one enjoys doing so, everyone has to pay taxes. For many people, taxes are automatically withheld from their paychecks by their employer, and their primary concern is filing their annual tax return. However, paying taxes can become more complicated for small business owners and those who are self-employed. These individuals should be sure to understand the best way to meet their tax obligations in a way that allows them to maintain financial security.

Concerns for Self-Employed Taxpayers

A person is considered self-employed if he or she is the owner of a sole proprietorship, if he or she works as an independent contractor, or if he or she otherwise operates his or her own business. People who are self-employed will not only need to file an annual tax return if they earn a net income of at least $400 in a year, but they must also make estimated tax payments on a quarterly basis.

One of the challenges that independent contractors who work for themselves have is to file taxes accurately. Typically an independent contractor may be required to file taxes using a 1099-MISC form. In other cases, they file taxes using a 1099-K form. The bottom line is however, is that if you are earning an income as an independent contractor, you will have to file taxes.

However, it can become confusing to classify the kind of work that you do. Tax filing for an independent contractor may not be as cut and dry, as filing for taxes when you are an employee of a company. For instance, how do you classify the kind of work that you do? Is it a business, or are you engaged in a hobby, that occasionally earns you an income?

Filing properly is very important because it determines the kind of tax that you pay, and the exemptions and deductions that are deducted. For example, if you earn an income via a hobby that you are currently engaged in, you may be able to use deductions to offset the income, but those deductions cannot be higher than your income, because there is no concept of suffering a loss in a hobby. Things can be dramatically different when you're engaged in a business, however. Businesses do involve profit and loss, and in fact, in the early stages of a business, it's fairly normal to not be making any profit at all.