Top 3 Tips You Should Know About Self-employment Taxes
Being self-employed offers many benefits like flexibility, being your own boss, and focusing on work you find rewarding. It also comes with some considerable challenges. While you’re acting as your own marketing team and human resources department, it can be difficult to perform as a freelancer while simultaneously worrying about the business side of your endeavor.
One of the most daunting challenges that most self-employed people face is taking care of their own taxes. If you earn more than $400 from self-employment, you are required to file as such with the IRS. As a freelancer, you are required to pay the same federal income taxes as those who are not self-employed, but the big difference is you no longer have an employer to withhold those taxes from your paychecks. That responsibility now lies with you and can be a bit daunting, but it is manageable with the right knowledge and plan of action. To make your life easier, here are three easy tips that can help you keep track of your income and your tax responsibility so it’s not as overwhelming:
#1 - Keep Accurate Records
As tedious as it may seem, one of the most important things you can do when you’re self-employed is to keep detailed and accurate records. You must keep track of all money coming in, this is usually done with invoices. Thankfully, there are tons of tools and services available to help you manage this. Most online accounting tools will generate invoices and allow you to track and record your income. But it’s also critical that you keep track of all the expenses you incur while operating your own business. Office supplies, transportation, and client entertaining are all expenses you should be tracking. You can simply utilize a spreadsheet, or you can again look for online tools, like Noums that can help streamline your process. You must also have documentation, meaning receipts. If you don’t have receipts for your expenses, then you cannot use them when filing your taxes. The trick with expenses is to track them consistently, as soon as they occur so that you’re not trying to play catch-up when it comes time to settle your taxes.
#2 - Estimate Your Taxes and Pay Quarterly
When you’re self-employed, you are technically both the employer and the employee, which makes you responsible for paying both the employer’s and employee’s portion of Social Security and Medicare – a combined rate of 15.3%. This is what is often referred to as the self-employment tax.
Since you don’t have an employer deducting tax from your paycheck, you may be obligated to pay your taxes on a quarterly basis. If you think you may fall into this category, the best thing to do is to estimate your quarterly taxes. Start by estimating your annual income, then subtract your estimated expenses, determine your income tax and self-employment tax (which is the 15.3% figure mentioned above), and that will give you your quarterly tax liability.
While this may sound confusing, you can consult the IRS website to determine your tax bracket or use a tax calculator to better understand your liability. There are also online resources that can help you estimate what you owe on a quarterly basis and help you come up with a payment plan like Turbo Tax and Tax Hub.
There are many benefits to tackling your taxes on a quarterly basis when you’re self-employed. Taxes are paid as you go, so if you’re not paying enough throughout the year, you may incur interest and penalties from the IRS. Quarterly payments will also help you manage your cash flow. If you are not deducting your taxes, you could have an unrealistic idea of how much you are truly netting as a freelancer. Remember, you are paying your estimated taxes on a quarterly basis, so if you overpay, you will receive a refund when you file your annual income tax return, just like those that are not self-employed.
#3 - Don’t Be Afraid to Get Help