Tax time can be extra taxing for the self-employed. What really do you count as income? What can you deduct as expenses? And why do you have to pay self-employment tax? Here are a few tax tips to help you prepare your self-employed tax return.
1. What is Self-Employment Income?
Self employment income can be any income that you earn as an independent contractor, a freelancer, or even money that comes in from a hobby. You don’t need to make much to be considered self-employed by the IRS.
2. What Business Expenses Can You Deduct?
The good news is that you can deduct any expenses that you incur to create income. Many people have expenses for items that are used for both business and personal, such as computers and internet costs. In those cases the IRS allows you to take a prorated amount as a deduction. Keep a log showing how much is business use, and how much is personal use to come up with your prorated deduction amount.
3. What is Self-Employment Tax?
When you work for someone else as an employee you have social security taxes deducted from your paycheck. Your employer pays an additional amount. When you are self-employed you pay both parts yourself as self-employment tax.
4. How Do You Report Self-Employment Income?
If you are not a corporation or a partnership you will report your self employment income and expenses on Schedule C. It is filed at the end of the year with your Form 1040. However, taxes are due through out the year. Estimated taxes are paid with form 1040-ES.
5. Where Can I Find More Information on Taxes and Self-Employment?
The IRS has many great resources to help self-employed people with their taxes. Start with these links from the IRS.
Congratulations! You have your own business! Now the bad news. Uncle Sam wants a big portion of your income.
When you start your own business, one of the first things you must plan for is paying your taxes.
How Often Do You Pay Estimated Taxes?
As an employee, your employer takes taxes out of each and every paycheck. When you are your own boss, you need to pay the IRS, not just on April 15, but three other times during the year.
Estimated tax payments are due on:
April 15 for income earned from January through March
June 15 for income earned April through May
September 15 for income earned June through August
January 15 for income earned September through December of the previous year
Income Taxes, Self-Employment Taxes, Quarterly Taxes? Which is it?
The taxes you pay as a self-employed business owner go by many different names, one of which is quarterly estimated tax payments. I find this kind of funny, because as you can see from the list above, the taxes are not paid every three months, rather they are paid four times a year on a rather random schedule. I have yet to find out why this is.
When you are self employed, your estimated tax payments are actually for two different taxes, income taxes and social security taxes. Social security taxes are often called self-employment taxes when talking about self-employed individuals. This is because as an employee, you pay 1/2 your social security and medicare taxes and your employer pays the other 1/2. When you are your own boss, you get to pay the full amount! Lucky you.
So, to answer the question, the answer is all of the above. Your quarterly estimated taxes are made up of income taxes and social security taxes. They are paid four times a year, but are not equally space out.
How Much Should You Pay
Ideally, four times a year you would calculate your income for the previous time period, estimate your income and social security taxes, and pay that amount. A quick estimate of the amount you should pay would be your federal income tax rate, plus 15% for self-employment taxes, times your net income. For example, if you are in the 15% federal income tax bracket, your estimated tax payment will be about 30% of your net income. Net income is all the money that came in, minus the expenses that you paid to earn that money. As a very rough guide, I find that most of my clients do OK when they pay 15 to 20% of their gross income. Gross income, simply stated, is all the money that your earned. If you want to be more exact, you can use this IRS Estimated Tax Worksheet to calculate how much you should pay each year.
This video has some good information on easy ways to track and save for your estimated tax payments.
How Do I Pay My Estimated Taxes
There are two ways to pay your estimated tax payments. One way is to use paper coupons provided by the IRS, and mail your payments to the IRS. Be sure to write your social security number on your check. The IRS Estimated Tax Worksheet has payment coupons and the addresses for where to mail your payment.
The IRS would prefer it if you would use their Electronic Federal Tax Payment System. At this website, once you register, you can easily make your tax payments from your computer. You can even schedule your tax payments to happen automatically.
Can I Pay My Taxes More Often?
It might seem like a silly question, but you would be surprised by how many people would like to pay their taxes more often. By paying your estimated taxes monthly, or even weekly, the payment amount is smaller, and many people find it easier on their budgets if they pay their taxes more often than quarterly.
Yes it is OK to pay your taxe more often, just print additional tax payment coupons, or use EFPTS, the Electronic Federal Tax Payment System to make a payment whenever you want.
What If I Miss A Payment, or Can’t Make A Payment?
Don’t worry about it too much. If you miss a payment the IRS is not going to come looking for you. Just make the payment as soon as you can. You may be penalized for paying late, or for not paying enough, but if you pay as much as you can as soon as you can, the penalty will be minimized.
If the reason you can’t make a payment is that you don’t have any income, then you really don’t need to worry about it. (At least not the taxes. ) No income means that no taxes are due.
I’ve Paid My Estimated Taxes, Now What?
When it is time to file your tax return, your estimated taxes will work much like withholding taxes on your tax return. On the tax payments section of the tax return, there will be a place for you to record exactly how much you have paid in estimated taxes. If you paid too much, you will get a refund, if you didn’t pay enough, you will owe additional taxes, and maybe some penalties.
Get into the habit of paying your estimated taxes, and tax time should not be too much of a problem.
Do you have any questions about paying estimated taxes, or any other tax questions? Ask in the comment section and I will be happy to answer!
I have seen many young fast growing businesses falling over because they didn’t have sound financial management practices in place. Ironically, it is when rapid business growth happens that the financial cracks emerge.
1. Hire a good accountant or bookkeeper before you earn your first dollar.
I cannot stress this enough. Too many new business owners make costly mistakes because they just didn’t know. A good accountant will help you through the maze of government regulation and provide advice that will help your business be more profitable. Almost without exception a good accountant will save you money.
2. Separate your business and personal finances.
You must have a separate checking account and separate credit card for business. Doing so is more professional and will give you clarity in your finances. Also, if your business is ever audited, your personal finances will not be included in the audit.
3. Manage cash flow.
Cash is king. Cash is the lifeblood of your business. Without cash or available credit your business cannot function. Good cash flow planning will allow you to plan for the ups and downs in your business and insure that you will be able to sail through the inevitable downturns in your business.
These three simple steps will insure that your business has a strong financial foundation and go a long ways towards insuring the success of your business.