Taxes 101: What you need to know
Happy Tax time, folks! Believe it or not, April will be here before you know it, which means you're about to have a ton of tax information thrown at you. But have you ever found yourself reading a tax article and having to Google almost every tax term? You're not alone!
Before you start getting your taxes in order, check out these definitions (that you can actually understand) for all those tricky tax phrases that are sure to pop up as you get filling!
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Common Tax Terms
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.
Business activity code - A special code from the IRS that matches your industry--it belongs on your Schedule C to indicate to the IRS what kind of work you do. There’s a code for every type of business--711510 for actors, 311800 for bakers, and about 200 more that all correspond to specific industries.
Business profit - The money you made 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 from doing so, you had business income, and will have to say so on your tax return.
Deductions or “write-offs” - These are the expenses that give you a tax break. If you pay for something that the IRS has decided you can “deduct” on your tax return, it means you can subtract that expense from your income. This is important for self-employed folks, because the lower your income, the less you pay in taxes.
Estimated payments or “quarterly taxes” - The taxes that you pay throughout the year on your self-employment income. The US 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 ¼ of your taxes every 3 months.
Form 1040 - 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 it’ll show how much you owe in taxes for the year.
Income - The money that you earn. Income is 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).
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 - The form that shows your self-employment tax. If you file your taxes online, this form will automatically be generated and attached to your tax return. Nothing else to worry about here!
Self-employment tax - There’s an additional tax that you pay on your business income. Your self-employment tax will be about 15% on top of your business profit--but only if you’ve made over $400 from your business.
Tax liability - What you owe in taxes. This is the amount of tax that you’re on the hook for when you send in your tax return.
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 eat into your tax liability).
Taxable income - This is what you pay taxes on. Calculate it by finding your AGI, then subtracting the standard deduction (or your itemized deductions) and the qualified business income deduction (if applicable)