Being self-employed can be an amazing feeling – until it’s time to pay taxes.
When it’s your first year being self-employed, tax time can be daunting to say the least. It can be hard to know where to start and what to do. Adding to the stress is the knowledge that you can face heavy fines if you get it wrong.
Fortunately, this quick self employment guide will walk you through everything you need to know about paying taxes. Keep this guide handy as you prepare your taxes this year!
How to Pay Taxes: A Self Employment Guide
There are many detailed steps to doing your self employment taxes. In this self employment guide, we’ll break it down into the simplest possible components. Read on to learn more!
1. How to Tell if You’re Self-Employed
“Self-employed” is kind of a vague term. What does it really mean, and how can you know if it applies to you?
Most of the time, as long as you own a business, you are self-employed.
Let’s take a look at the breakdown of different ways you can be self-employed.
As a sole proprietor, you’ll be reporting business expenses and income on Schedule C. This means you have to pay taxes that cover Medicare and Social Security.
Corporations and Partnerships
There are a few different ways that corporations and partnerships can work.
If you go into business with a partner, you can choose to file as either a corporation or a partnership. As a partnership, you’re exempt from federal income tax, and are still technically self-employed.
However, if you are the owner of a corporation, you’re technically not self-employed, and your tax structure will be different.
2. What Does “Self Employment Tax” Mean?
As a business owner, taxes aren’t automatically withheld from your paycheck. That’s why you need a self employment guide to help you figure out how to pay the taxes on your own.
These taxes go to the Social Security Administration to cover Medicare and Social Security. Your company’s net earnings will affect how much you pay.
3. What’s the Tax Rate?
When you’re self-employed, the tax rate you must pay is 15.3 percent. However, you’ll also have to pay the federal income tax of 15 percent. Together, this adds up to a hefty chunk of your income.
Needless to say, it takes a lot of planning and prep work all year round to be ready for tax season. Next up in the self employment guide is how to get and stay ready to pay your taxes.
Preparing to Pay Taxes
Part of doing your self employment taxes is getting as many deductions as possible. Deducting your business expenses can help lessen the tax burden you’re responsible for.
In order to get the right deductions, you have to be prepared and organized throughout the year. Let’s take a look at how to do that.
1. Getting a Tax ID Number
A tax ID number isn’t necessary for all self-employed individuals. However, it can be helpful in case your customers need a W-9 form. And if you have employees, you’re required to have a tax ID number.
2. The Home Office Deduction
This is a great deduction if you’re a freelancer or are self-employed.
To get the home office deduction, you need to have a space in your home that’s used only for business. It doesn’t have to be a complete room – it can be a corner where your desk is located – but that area can’t be used for anything but business.
If you don’t have a home office yet, consider setting one up now so you can maximize your tax deduction.
3. Keeping Track of Your Money
One of the most important tasks when your self-employed is just staying organized with your business income and expenses.
There are many apps that can help you keep track of your money more effectively. Try QuickBooks Self-Employed for help with your specific tax needs. Other finance apps, like Mint, are great for general budgeting and record-keeping, too.
4. Travel Deductions
In addition to your home office deduction, there are also travel deductions you can use if you’re self-employed.
Car and driving expenses are one of the deductions self-employed people use the most. You’ll want to keep track of the miles you drive for business purposes so you can accurately claim the deduction.
Some of the apps listed above, like QuickBooks Self-Employed, can help you track your business miles.
5. Other Deductions
In addition to deductions for your car and miles driven, there are many other deductions you should think about.
Office supplies and other business supplies are something obvious for you to deduct. You can also deduct the cost of business travel, and even education related to your business or industry.
Just make sure you have receipts and evidence of all your business expenses, as the IRS will need proof of any deductions you claim.
Paying Quarterly Estimated Taxes
When you’re self-employed, you’re no longer just paying taxes once a year. You’ll also need to pay estimated taxes four times a year. When you do your annual taxes, you shouldn’t owe much if your estimated taxes were fairly accurate.
There are a few different ways you can estimate your quarterly payments. If your income is fairly consistent, you can just divide your projected annual income by four, then calculate how much tax you’ll owe on that amount.
If your income is less predictable, you may want to set aside money for taxes as it comes in. A good estimate is saving 30 percent of all business-related income for taxes. It’s better to save too much than too little!
When quarterly taxes come due, you can use the money you set aside to pay a pretty accurate estimate. Although saving 30 percent feels like a lot, it’s better than not being prepared when a tax payment is due.
Ready to Pay Self Employment Taxes?
With this self employment guide in hand, you’re now ready to pay your taxes with confidence.
Want to learn more about working from home? Check out more helpful guides here!