Form 1040 – The main tax document that everyone fills out is called a Form 1040. This is the tax form headquarters and it serves as the center of all the forms and attachments. In 2018, the IRS shortened the Form 1040 to make it simpler. As a result, it moved a lot of the information that was previously contained on the Form 1040 to different schedules. Now, you’ll likely file a Form 1040 with some, or all, of these different schedules attached. To figure out your quarterly tax payments, you’ll fill out a simplified version of this annual tax form, called the Form 1040-ES.
Schedule C – Freelancers, people with a side business, or anyone who works for themselves (unless you have an S-Corp) will have to fill out a Schedule C with their taxes, which is used to report that business income. After it’s filled out, you’ll attach the Schedule C to your Form 1040. There are some exceptions to this — for example, if your business is farming you’d fill out a Schedule F instead of a Schedule C, if it involves rental income or royalties you’d fill out Schedule E. Most people will use a Schedule C though. This is one of your most important forms, as you can take a lot of business deductions here!
- Note on S-Corps – The IRS views corporations as their own living, breathing, taxable entity. This is different from a single-member LLC or a sole-proprietorship which most freelancers use, as the IRS considers these “disregarded entities” (meaning these entities are just pass-throughs where the owner is responsible for the taxes). If you have an S-Corp, you’ll have to file a Form 1120-S corporate tax return, and you’ll no longer use a Schedule C. You’ll calculate the income of the standalone business, and take the business expense deductions on Form 1120-S now. Then the income from this corporation will be distributed to the owner of the S-Corp (you) on a Schedule K-1, which you’ll report on your Form 1040.
Schedule SE – The Schedule SE (self-employed) will need to be filed to calculate your self-employment taxes. You’ll pay them on the “other taxes” section of your Form 1040.
Schedule 1 – If you’re self-employed you’ll also likely need to file a Schedule 1. Schedule 1 has two parts – the first part is for claiming certain types of income that are not on your Form 1040 (Form 1040 only collects information for the most common types of income; so if you sold a business, for example, you’d need to claim the income from the sale on Schedule 1). Part 2 of Schedule 1 is where you can file adjustments to your income. Most self-employed people will want to take deductions here. This is where you can deduct contributions to a Health Spending Account (HSA), the deductible portion of Self-Employment taxes, contributions to an IRA or other retirement savings vehicle, up to $2,500 of student loan interest, and up to $4,000 of higher education tuition, among other things.
Schedule 3 – If you’re claiming any tax credits you’ll need to file a Schedule 3. In 2021, there is a Child Tax Credit, so if you have any children you’ll likely need this form. There is also the Earned Income Tax Credit for families with less than $57,414 of income (it depends on a number of factors but is worth checking your eligibility), and the American Opportunity Tax Credit for tax paying students or their parents, among others.
Schedule A – If you choose to itemize your expenses (mortgage interest, property taxes, medical or dental expenses over a certain amount, and charitable contributions) you will do so on Schedule A. Everyone has to choose between taking the Standard Deduction ($12,550 for single filers and $25,100 for joint filers in 2021) or itemizing your deductions. If your itemized expenses are greater than the Standard Deduction, then you should itemize. If not, you should take the Standard Deduction.
Once you’ve filled out all these forms, you’ll be able to calculate your Adjusted Gross Income or AGI. This is the starting point for all your tax calculations. AGI is the money you made during the year, less “above the line” deductions for things like retirement contributions, student loan interest, and some health insurance premiums. The following are acceptable “above the line” deductions:
- Health Savings Account contributions from Form 8889
- Deductible part of Self-Employment tax
- Contributions to a qualified retirement plan
- Up to $2,500 in interest on student loans
Once you have your AGI, then you’ll take the standard deduction (or if you itemize your deductions, you’ll reduce your AGI by the itemized deduction from Schedule A) to arrive at your taxable income.
The distinction between the AGI and taxable income can be an important one. For example, in 2021 if a couples’ AGI was below $150k ($75k for individuals) they were eligible for $1,400 of stimulus payments for each member of a household. If you’re just above $150k of AGI, you can reduce your AGI by making pretax contributions to a 401(k), SEP IRA, HSA, or flexible spending account for 2021. However, itemized deductions for things like charitable contributions, mortgage interest, state taxes, and other deductions that you itemize on your Schedule A won’t reduce your AGI (just your taxable income). For 2021, there is also a $1,600 credit per child under 6 years old and $1,000 credit per child under 18 years old that starts phasing out at $150k of AGI for joint filers ($75k for singles, and $112.5k for heads of households).