Being self-employed is a dream come true for many Americans. But, while many things about self-employment are beneficial, one of the hardest aspects is taxes. When you work full-time for a company, your taxes are basically handled for you—a percentage is withheld from each check and when you go to file your taxes, you just have to input your W2 and wait for your tax return in the mail.
But, for those of us that are self-employed or working as a freelancer, taxes aren’t nearly this easy. W2’s are no longer part of the vocabulary. Instead, you will need to look out for 1099’s and begin to set aside your own withholdings each year.
Being self-employed changes the way you view your taxes. In order to avoid issues with the IRS, consider doing these four things.
1. Create an account for estimated taxes
After you determine your tax bracket, try to set aside a certain percentage each paycheck, month, or quarter—and always round up. If you are paying your taxes quarterly and end up paying more than you owe at the end of the year, the IRS will send you a refund or use that money towards your next return. But if you pay less than you owe, you could incur a penalty. This is a great way to stay up-to-date on your taxes and avoid having to owe a very large sum come tax time.
2. Know any withholdings you may have
If you file jointly and your spouse works, you may be able to offset some costs by having them increase their withholdings through their company. An individual who may just be self-employed half the time, may be able to rely on their own W-2 to withhold more taxes than they normally would. LLC’s with an S status also allow withholdings.
3. Understand the Self Employment Tax
The self-employment tax is officially called the SECA tax. If you fall under the self-employed umbrella, you will owe 15 percent of your income, rather than the 7.5 percent that employees pay (as their employer pays the other half). Be sure to estimate this correctly when paying your taxes and always stay up to date with tax laws as they can change without much notice.
4. Work with a tax professional
When you are self-employed, your taxes can be confusing. If you receive 1099’s from multiple different places, or have a high income that will be taxed at a higher percentage, it may be in your best interest to work with a tax professional each year. They will help you determine what you need to be paying each quarter and find any deductions that can reduce these payments.
If you are self-employed and are interested in working with a tax professional, contact the tax professionals at Levy Tax & Associates.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.