Aha, summertime – it’s a time when young adults (and some teachers too) become entrepreneurs. Whether it be a summer job or a part-time role, by the time high school and college role around, many young adults can be considered self-employed.
If that is you, or someone you know, here are a few helpful tips to help you navigate your tax situation.
All income must be reported. Although you can earn a certain amount of income each year without having to pay taxes or file a tax return, if you are required to file a tax return, all income you receive from any source is reportable on your tax return. That includes income from hobbies, side jobs, self-employment, barter exchanges, and any sort of fellowship for which you perform services.
Withholding and estimated taxes. If you are an employee, your employer withholds tax from your paychecks. If you are self-employed, you may have to pay estimated taxes directly to the IRS on set dates during the year.
Income from self-employment.. If your income is from a business or service, for example, work as an independent contractor in sales or from babysitting, housecleaning, gardening, etc., that income is self-employment income that you should report on Schedule C or Schedule C-EZ, Profit or Loss from Business. You may also receive nice tax deductions from business expenses in connection with that income, such as supplies, auto mileage, and cost of goods sold. If the net income after subtracting those expenses exceeds $400, you’ll also need to prepare Schedule SE for self-employment taxes. Those forms are included as a part of your personal income tax return on Form 1040. There’s no need to know what forms to use. TurboTax will figure it out for you.
Barter income. Sometimes you aren’t paid in cash, and instead you receive services or goods in exchange for your work. That’s called bartering, and you must report the fair market value of the goods and services you receive. For example, if you spend the summer tutoring your neighbor’s children and he gives you a credit at the restaurant he operates or a bicycle from the bicycle shop he owns, that’s income to you.
ROTC pay. If you are in ROTC, then you might receive active duty pay for summer advanced camp. That income is taxable to you, though a subsistence allowance you get while in advanced training is not taxable.
Filing a tax return. Even if you can be claimed as a dependent on someone else’s tax return, you’ll still need to file a tax return if your income exceeds the standard deduction for that year ($6,300 for single taxpayers in 2016), or if your self-employment income is $400 or more. Even if you aren’t required to file a tax return, you’ll still want to file if income taxes have been withheld from your paycheck since you may get that money back.
Don’t worry about knowing these tax rules and how to claim self-employment income, TurboTax ask you simple questions about you and helps you easily file your taxes based on answers to your questions. You can also use QuickBooks Self-Employed to track your business income and expenses, estimate your quarterly taxes, and your information can easily transfer to TurboTax Online Home & Business making tax filing effortless.