For us self-employed people, it’s time to pay up. Your clients, unlike an employer, will not withhold taxes for you. It’s up to you to keep track of your income and expenses and pay your taxes on time and in full.
I will admit that it’s going to be hard for me to write this without interjecting my personal views on taxation. I will do my best to stick to the basics and keep this factual. We all know the old saying, you make they take. So what should you know about taxes and self-employment?
There are several types of theft, I mean taxation (I told you this would be hard).
- State Income Tax
- Federal Income Tax
- Social Security Tax
- Medicare Tax
Social security tax, also known as self-employment tax. You now have to pay the whole amount yourself, around 15%. If you have a job then your employer pays half and you pay half. Remember this when you start to employ people, you pay someone $12.00 per hour it will cost you closer to $16.00 per hour.
Fortunately, you are also allowed to deduct some of your self-employment taxes when you are calculating your expenses. The IRS has put together some helpful information here.
You may be wondering how to calculate what you owe. Without getting into the details, I can suggest as a general rule to estimate at least 25% of your profit for taxes. That’s your profit, not your gross sales.
This should be submitted quarterly to the IRS and your state. If you overpay, you will get a refund when tax time comes. If you underpay, you will owe by April 15th. You can make quarterly estimated payments online for state and federal taxes, for your convenience of course.
If you underpay or find that you owe more than planned, be upfront about it. The government will work with you and accept payments, with hefty interest and penalty to go with it.
Sales & Deductions:
Sales minus expenses equal profits, right? Well, the simple answer is yes, the confusion often comes when deductions are brought up.
There’s a lot of misinformation that floats around when people discuss small business ownership. There are many deductions that you can take that aren’t necessarily cash out of pocket, as in you did not pay for them directly.
Common Deductions Include:
- Office rent
- Utilities such as cell phone, internet, electric
- Home base office (be careful with this one)
- Training & education
The IRS has put together some information to help guide you, visit this page to learn more.
You obviously want to take as many deductions as possible, without breaking the law. Or the tax man will be coming for you. Never under-report your sales, the government can easily track any B2B payments that are made through 1099 reporting.
They also have formulas to track cash businesses as well. Deductions are the key to lowering your tax liability, but great caution must be used. To really take advantage of deductions you need to take my next suggestion.
Hire a Professional
I failed to file one form at tax time and New York State fined me $1,000.00! There was no mercy or bargain, I had to pay it. I bet I could have hired a pro for a bit less and been better off.
A professional can help you with deductions and help keep you out of trouble. It’s extremely important for you to keep good records that can easily be shared with your accountant. Of course, any money you spend on an accountant is deductible.
Being self-employed can be an intimidating process for people. With some planning, knowledge, and patience keeping the books does not have to be a difficult task.
The tax codes and laws are constantly changing, it’s important to pay attention and have a trusted professional to guide you.