While there are many attractive features of being self-employed, one of the drawbacks is the additional tax that could be due come tax time. As a self-employed individual, you may be uncertain of what your annual income will be since your cash flow fluctuates throughout the year. This makes it hard to estimate how your self-employment activity impacts your taxes. The child tax credit is one of many credits available to help offset the taxes incurred from being self-employed.
Child Tax Credit
The child tax credit is a credit available to parents who have a dependent child under the age of 17. The maximum credit allowed is $1,000 per child and you can claim up to three eligible children. Additionally, you must fall within certain income limits to claim the credit. If you are married and filing jointly, your combined income must be less than $110,000. If you are single or filing as head of the household, your income must be less than $75,000. You can’t claim the child tax credit if your filing status is married and filing separately.
Read More: Child Tax Credit: A Guide for Federal Deductions
Taxes on Self-Employment Income
Self-employed individuals include sole proprietors and independent contractors. You are an independent contractor if you receive income on a 1099 basis. There are two taxes on self-employment income: income tax and self-employment tax. These taxes are figured on your net income from self-employment. Net income equals your gross receipts minus eligible expenses. For example, if your revenue is $50,000 before expenses, you are not taxed on the $50,000. You must first deduct all expenses from the $50,000. That sum is the amount you pay tax on. When you prepare your taxes, the income tax from your earnings is figured before credits. The self-employment tax is reported after credits.
Refundable Tax Credits
Tax credits are either refundable or nonrefundable. Refundable credits are amounts you can use to offset any taxes due (including self-employment tax). If you do not have any tax due you can receive the surplus as a refund. Examples of refundable tax credits include withholding credits, earned income credit and additional child tax credit.
Nonrefundable Tax Credits
Nonrefundable credits are credit amounts you can use to offset income tax only. Nonrefundable credits can only reduce income tax to zero. If there is surplus credit, you don’t receive the extra amount. Examples of nonrefundable credits are childcare credit, child tax credit and retirement savings credits. If you are self-employed and you reduce your income tax to zero, you still have to pay self-employment tax. The child tax credit can be figured as a nonrefundable or refundable credit. Since you can claim the credit either way, see if you qualify for any other nonrefundable credits to reduce your income tax, as it may be more beneficial to take the child tax credit as a refundable credit to reduce your self-employment taxes. Refundable credits are the only credits that can reduce self-employment tax.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.