The issue of taxation in the USA can be confusing and complicated for self-employed persons and owners of small businesses. Self-employed persons in the USA are required to handle several kinds of taxes and report and pay self-employment taxes as a part of their annual commitment to the tax authority. Nevertheless, knowing the different required taxes and reports as well as professional assistance can help managing the business efficiently and according to the law.
Federal Income Tax
One of the main taxes in the self-employment American tax system. It obliges a payment which is a federal income taxation imposed on individuals and businesses based on their incomes. The federal taxation is carried by the 1040 form of the IRS which must be filled by April 15th every year for the previous year’s incomes.
Types of Taxed Incomes
Any income from work, sales or rents of real estates is taxed for a self-employed person paying American self-employment taxes. The self-employed person must report these incomes, deduct write-off business expenses and calculate the taxed profits.
Tax Rates
Taxed income tax rates vary from 10% to 37% according to the income amount. The higher the income the higher the tax rates.
Advance Payments and Change Requests
Self-employed persons pay quarterly advance tax payments. With the help of skilled tax advisors, a request for changing the advance payment rate can be submitted. Conducting written records to enable deductions and allowances is important.
Local and State Taxation
In addition to federal taxes, Self-employed persons in the USA must pay local and state taxes. State taxation varies among states, but it is usually based on the 1040 federal form. Each state determines different tax rate for incomes. In most cases, state taxes are lower than federal taxes. However, in states such as California there are relatively high state taxes that can reach up to 13.3% of the income. In Addition, different cities and local authorities in the USA charge local income taxes. The rates are determined by the authority and can run between 1%-3% of the income on average.
When paying the American self-employment taxes, checking what the tax rates are in each area of operation is important. To righty calculate the sum of the tax liability, one must know the state and local taxation rules and adjust the reports accordingly. It is recommended to get the assistance of the different state and region laws proficient tax advisors. Here in MasAmerica we employ tax experts who can solve any problem and answer any question regarding self-employment taxation.
Social Security and Health Taxation
As a self-employed person in the USA, you must pay taxes for the social security institute and the governmental health program Medicare. Social security taxes are about 15.3% of the income up to an annual ceiling. Medicare taxes are about 2.9% of the income with no ceiling.
American self-employment taxes are paid even without stipends entitlement. The payments grant future rights for social security stipends and governmental health insurance. The taxes must be reported and paid throughout the years or by its end. These amounts can be deducted from the income tax. These taxes must be paid on time to keep one’s social rights as a Self-employed person and to avoid penalties. The safest way to avoid mistakes is to be assisted by tax experts.
Business Taxes
There are different taxes and fees imposed on operating small business in many states and cities in the USA. These taxes include concession taxes, business licenses and permits among others. As a self-employed person operating a business in the USA, knowing what the locally required taxes and payments are is important. For instance, concession taxes are an annual permanent payment some states require so that the business could operate legally in their area. Different kind of businesses such as retail stores, are sometimes required to have a business license that is subjected to an annual fee to the local authority. Other businesses, such as restaurant or other food industry businesses, are required special permits and licenses. The self-employed person must check with the local state and city authorities what the rules and required payments for operating his or her business are exactly. Paying these taxes and fees on time is essential for ensuring the legality of the business operation.
Keeping Books and Records
Keeping account books and organised records are an inseparable of handling reporting and payment obligation to the tax authority for the self-employed person. To accurately report to the tax authorities and enjoy deductions and exemptions a self-employed person is entitled to one must keep organized records of the financial activity in the business. The records must include all the relevant documents for expenses and incomes in the business such as tax invoices, payments receipts, reports of traveling and business hosting etc. It is also important to keep records of business properties, and business’ loans and debts. Many people think they can keep the books easily, but our experience testifies that consulting experts like us will prevent any concerns or faults. You can ask our hundreds of satisfied clients. Neglect, lack of precision or malice regarding your obligations may result in penalties or arrest. The keeping of accurate and updated records is also important to enable better business decision making as well as intact business management. Hence, a precise keeping of books for the self-employed person is critical. It will enable saving on tax payments, avoiding penalties and sanctions for misreporting and running the business efficiently and legally.
Self-Employment Taxation – The USA Versus the Rest of the World
* There are progressive American taxes for self-employed persons within the American income tax. The higher the income the higher the paid tax rate. Tax rates in Europe are more unified and fixed.
* The USA taxation is mostly federal, with lower state and local taxes. The main tax in Europe is local/regional.
* American self-employment taxes include more exemptions and deductions on taxes such as car expenses and business travels. There less tax benefits for self-employed persons in Europe.
* Self-employed persons pay social security and healthcare separately from the tax. In European countries these payments are included in the income tax.
* In the USA the report and payment systems are complex and professional counselling in needed. The European system is easier and simpler to understand and report independently.
* A high percentage of the self-employed persons in the USA establish an LLC for tax purposes. Most of the self -employed persons in Europe operate as individuals.
* The USA holds severe sanctions for not reporting or evading taxes. The sanctions in Europe are more moderate.
Friendly States for Self-Employed Persons in the USA
There are significant differences between US states regarding the treatment of self-employed businesses and the ease of handling the tax and regulation authorities. There are states that are considered more friendly to self-employed persons than others. For example, Texas is considered one of the best states for self-employed persons thanks to low taxation. There are no state or local income taxes and the rate of the federal income tax is relatively low. Florida is also known for convenient taxation for self-employed persons and without state income tax. Yet, in countries such as California and New York, taxes are higher and there are also additional state taxes for income and sales. The bureaucracy is also considered heavier and less friendly for small businesses.
Questions and Answers Regarding American Taxes for Self-Employed Persons
The main American self-employment taxes are the federal income tax, calculated by form 1040 which is serve to the IRS annually. Local and state taxes in varied rates according to states and cities. Social security taxes and governmental health insurance. Local fees and taxes such as business licenses and concession taxes.
Self-employed persons in the USA are eligible for exemptions and deductions for travel and car expenses, workers’ wages, insurance, depreciation and reduction over properties and equipment, office expenses etc. It is recommended to keep organized records of expenses to maximize these deductions and reducing the tax.
Establishing an LLC enables flexibility in choosing the taxation method and can provide tax benefits in certain cases. The advantages include a possibility to deduct company expenses, postponing profit taxation and personal properties protection. However, there are many disadvantages like bureaucratic complexity and higher management costs. It is recommended to consult an accountant regarding the profitability of establishing an LLC according to the business’s circumstances.
Not reporting correctly or not paying taxes on time may expose the self-employed person to high penalties from the American IRS. More severe cases such as intentional evading of taxes may result in an arrest. Therefore, it is important to report as needed and be assisted by professional counselling to handle the tax obligations correctly. Transparency and accuracy are the key to avoiding problems with the American tax authority.
