"Self-employment taxes" is a phrase to send chills down the spine of most people who own their own business. But it doesn't have to be that way.
Sure, paying taxes as a self-employed person can be more complicated than as a company employee. For self-employed people, the government expects you to help them figure out how much tax you owe, unlike getting a check with the taxes already removed.
The process sounds intimidating, but there are many resources available for self-employed people trying to sort out the tax code.
The first thing to determine is when you need to pay.
If you are self-employed, you may have to pay estimated taxes on your earnings throughout the year.
Not everyone has to pay them, but if your primary job is self-employment and you make enough to live on there's a good chance you'll have to. Skipping those quarterly payments can mean an underpayment penalty at tax time.
Self-employed people are also expected to pay their Social Security and Medicare taxes to the government out of their earnings. That can be a shock for people used to getting a paycheck with those taxes already removed.
You can protect yourself by automatically putting away a portion of your income in preparation for tax time. That way, when the bill comes due there will be a way to pay it.
There are some additional stresses from filing self-employment taxes but there is also a big upside in tax deductions.
Your self-employment tax itself is deductible up to 50%. That means half of those taxes you had to pay can be deducted from your total tax burden. There are also deductions for having a home office, buying your own health insurance, and for your business expenses.
If you are taking deductions for individual business expenses make sure to keep your paperwork in good order. In the event of an audit it's important to have all the documentation available to prove your case.
If you want professional help dealing with self-employment taxes you might think to ask an accountant but a tax attorney might be a better choice. Tax attorneys are able not only to prepare your tax return but also give you legal advice on your self-employment tax strategy.
Regardless of how you manage it, dealing with self-employment taxes doesn't have to be scary. Arm yourself with knowledge and a little outside help and the process should go smoothly.
- Need help with your taxes? Get your tax issue reviewed by an attorney for free (Consumer Injury)
- Self-Employed Individuals Tax Center (IRS)
- Self-Employment Taxes Q&A (FindLaw)
- Small Firms Dodge $198B in Federal Taxes (FindLaw's Free Enterprise)