As we approach tax time, many people who work as independent contractors–including street vendors–struggle with how to file the necessary tax documents. There are several things you need to know to operate efficiently and keep up on your taxes. The first is about Self-Employment Tax. This basically consists of Social Security and Medicare taxes.
These taxes are usually split between the employer and employee, but when you work for yourself, you pay the entire amount. Social Security tax is 12.4 percent and Medicare tax is 2.9 percent. These taxes are in addition to federal and state (or District of Columbia) income taxes.
A silver lining is that the Self Employment Tax is deductible from your income tax.
To determine what income tax you owe, you must calculate your net profit: revenue (sales) minus expenses. For example, a Street Sense vendor who sells 30 papers each day at the suggested donation of $2 would have revenue of $60 and expenses of $15 (cost of $0.50 per paper) for a net profit of $45 per day. Over a five-day week, this would be $235. On that amount, Social Security tax would be $29.14 and Medicare tax would be about $6.82. Therefore, Self-Employment Tax for the week would be $35.86.
Self-employed persons assume responsibility for all of these taxes, and you should set aside enough money from these sales to cover them in order to avoid interest and penalties later. It is advisable to set money aside in a separate account or pay it quarterly to make sure you are not surprised at the end of the year. You must file a tax return if your net profit will be in excess of $400.
Businesses whose sales have a potential liability must also purchase liability insurance. This would be an unnecessary expense for a Street Sense vendor; however, it would be essential for a vendor operating a food cart to cover the possibility of people getting sick from the food.
I strongly recommend you find tax help to make sure you do not make serious errors. Beginning on February 1, 2015, in partnership with Community Tax Aid DC and the AARP, DC Libraries have been offering free tax help between one to six times per week, depending on the library. The complete listing can be found at dclibrary.org/services/incometax. If you are self-employed, you can use a Schedule SE form to determine the amount of self-employment taxes owed. Vendor will like file a Schedule C and 1040 for their tax return. I repeat, it is strongly recommended you seek tax help to avoid errors.
In the next issue, I will explain how to handle back income taxes and what to do if you owe money for back Self-Employment taxes. I will also cover other free and low cost help with filing your tax return.
