There are many benefits to being self-employed: you can make your own schedule, you can work comfortably from your own home, and you can choose how you spend your time. But, with those benefits come a lot of difficulties, namely when it comes to doing your taxes.
When you have an employer or work for a corporation, your taxes are mainly taken care of for you. They already cover your income tax, and when it’s time to send in your return, all you have to do is simply send in a W-2 form. But, when you’re self-employed, taxes become a whole new ball game. For most, taxes aren’t taken out every paycheck, so you must budget for that on your own. Basically, your tax return just became a lot more complicated.
How are my taxes different?
When you classify as self-employed, this usually means that you will have to add a self-employment tax to the taxes you have to pay, in addition to income tax. The self-employment tax covers the Social Security and Medicare payments that are usually covered by an employer. The amount you have to pay depends on the amount of money you make. Talking with a tax professional will help you understand exactly how much you will have to pay and help you budget for it.
Self-employed individuals are also expected to pay their taxes quarterly, rather than once a year.
How do you make estimated tax payments?
These quarterly payments are estimated payments, as your full tax return will not be known until your return is filed. Regardless of this, self-employed individuals are required to make estimates and pay a quarterly amount towards their taxes.
If you have been self-employed for awhile, you are probably already aware of the amount you should be paying and can easily adjust it for any small changes in income. But if this is your first year classified as self-employed, the process may be a bit troubling. The first thing to do is fill out the Form 1040-ES, Estimated Tax for Individuals. This form is a worksheet that helps you find out if you are required to pay quarterly. Once this has been determined, you can work with a tax professional to decipher your quarterly amounts. If you pay more than needed, you can fill out another form and roll over the extra amount towards next year’s taxes. If you didn’t pay enough, the amount you didn’t pay will be added to next year’s taxes.
Are there any tax benefits?
Being self-employed usually means you are able to deduct a lot more items from your taxes, lowering your quarterly payments and the overall amount you will have to owe each year. Do you use a home office? That’s a deduction. Do you own the company with your spouse? The employment tax is different for families and can reduce the amount of taxes owed.
Be sure to speak with a tax professional to learn more about deductions and what you can do to lower your payments. If you are self-employed and have questions about your taxes, Form 1040-ES or tax benefits, contact Levy Tax & Associates. We can be reached at 1-800-TAX-LEVY or on our website.