Being self-employed can be a pretty awesome gig; it essentially allows you not only to be your own boss and determine your own income, but being self-employed also gives you the freedom of working from home, on the road, or just about anywhere. In this sense, the work schedule of a self-employed individual is often a lot more flexible, which is great for those who have children or simply like being able to work on their own time. What many people do not realize upon beginning to earn income as a self-employed individual, however, is that they are often subjected to more taxes. This realization can be very stressful come tax time, especially if the unknowing individual realizes that he or she did not put enough money away throughout the year to make the tax payment.
Fortunately, there are some steps that can be taken to avoid stress and worry during tax time. For starters, all self-employed individuals should make themselves aware that they will be subject to what is referred to as a “self-employment tax.” This tax is charged around the rate of 13% of all income and cannot be offset by deductions or credits. At first, this may seem unfair, but there is solid justification for this tax, as it goes toward Medicare and Social Security that would typically be paid by a W2 employee.
For the most part, in order to ensure that self-employed individuals put enough money to pay taxes, it is generally recommended that one opens a savings account and sets at least 25% of all self-employment income aside with each payment received. Furthermore, it is required that all self-employed individuals who plan on owing $1,000 or more to the government at the end of the tax year file their taxes quarterly, which means making four smaller payments throughout the course of the year as opposed to just one. Failure to file quarterly can result in heavy fines and penalties, even if the total amount owed is paid once taxes are filed, so be sure to start paying quarterly as soon as possible.
Furthermore, it is recommended that all self-employed individuals keep careful track of all of their earnings and income. After all, every penny will need to be accurately reported to the government, and if you are inaccurate in your reporting, you risk being audited or charged penalties. By keeping these tips in mind, you will be better off when it comes time to file your taxes as a self-employed individual.
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Hayley is a freelance financial and business blogger. She recommends Blue Tax, for tax debt help in Los Angeles.