Taxes 101: Common Tax Terms You Need To Know
Have you ever found yourself reading a tax article or form and needing to Google all the lingo? To spare you the headache, we’ve created a guide to understanding common tax terms.
As an independent worker, taxes — and the jargon that comes with them — can be even more confusing. So before you start getting your taxes in order, check out these tax terms definitions (that you can actually understand) for all those tricky tax phrases that are sure to pop up as you file.
The basics
Tax liability: This is what you owe in taxes. In other words, it’s how much you have to pay when you submit your tax return.
Self-employment tax: This is an additional tax that you pay on your business income. Your self-employment tax will be about 15 percent on top of your business profit — but only if you’ve made over $400 from your business.
Tax refund: This is the money that you get back after filing. Have you ever received a check back from the IRS after you filed your taxes? It’s because you’ve either been paying too much in taxes throughout the year or you qualified for a refundable tax credit (a tax break that will lower the amount you have to pay in taxes).
Income: This is the money that you receive in exchange for goods or services. You’re taxed on any income that you earn throughout the year (with a few exceptions).
Adjusted gross income (AGI): Your income minus certain IRS-approved deductions. The IRS will use your AGI to see if you’re eligible for certain tax breaks. The lower your AGI, the more tax breaks you may receive.
Taxable income: This is the income that you actually pay taxes on. Calculate it by finding your AGI, then subtract the standard deduction (or your itemized deductions) and the qualified business income deduction (if applicable).
Business activity code: A special code from the IRS that matches your industry, which you include on your Schedule C to indicate to the IRS what kind of work you do. There’s a code for every type of business — for instance, “711510” for actors, “311800” for bakers, and about 200 more that each correspond to a specific industry.
Business profit: The money you make from your business after expenses. When you file your taxes, you have to name each type of income that you received throughout the year. If you work for yourself and made money doing so, that’s business income that you’ll have to report on your tax return.
Deductions (also known as “write-offs”): These are IRS-approved business expenses you can subtract from your taxable income. In other words, they help lower the amount of money you actually have to pay taxes on.
Quarterly taxes: These are the taxes that you pay four times a year on your estimated self-employment income. The U.S. has a “pay-as-you-go” income tax system. That means you pay taxes on your income throughout the year as you receive income. When you’re traditionally employed, this is automatically accounted for from tax withholdings in your paycheck. When you’re self-employed, however, you have to take care of that yourself by paying a quarter of your taxes every three months.
Tax forms, defined
Form 1040: This is the form you’ll use to file your federal income taxes. A completed Form 1040 will include information on your income, expenses from the year, a few details about your tax situation, and how much you owe in taxes for the year.
Schedule C: When you have business income, you have to attach an extra form to your tax return to describe your business. This form is called the Schedule C. It lists your business income, expenses, and a few extra details about what kind of work you do.
Schedule SE: This form shows your self-employment tax. If you file your taxes online, the Schedule SE form will automatically be generated and attached to your tax return. Nothing else to worry about here!
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