Preparing for Tax Time - Self-Employed Individuals
The Taxman: that guy that everybody loves to hate. Whether he is taking too much out of your paychecks before payday, or raking you over the coals in April, it seems as though everyone thinks their tax treatment is unfair.
Over the coming weeks, I’ll be blogging about various tax issues that may or may not be pertinent to your tax situation. The fact is, you can’t avoid the The Taxman. He’s like the dentist; the longer you wait to talk to him, the more it’s going to hurt. Similarly, if you plan ahead you can minimize the discomfort in either scenario.
Tax planning can mean a lot of things, but today I am going to focus on tax planning for self-employed individuals. Self-employed may mean that you intentionally set out to own your own business, or that you worked for someone else that considered you to be an “independent contractor” and because of that they did not withhold taxes from your check. Either way, there are major tax consequences that you should be aware of so that you are not shell-shocked come April.
“Why are self-employed individuals subject to a different tax rate?”
This is the most common question I get from those new to self-employment. The short answer is this: When you’re working a job where your wages are being withheld, you and your employer both bear the burden of your Social Security and Medicare taxes. Your employer is responsible for a certain percentage of that tax, and you are responsible for the remainder, which is withheld from your checks and remitted to the IRS on a regular basis. When you’re self-employed, you are responsible for the entire amount. The combination of Social Security and Medicare that self-employed individuals must pay is commonly referred to as Self-Employment Tax, or SE Tax.
“I’m self-employed. What should I do to plan ahead?”
Since taxes are not being withheld from your checks and remitted to the IRS on a regular basis, it’s a good idea for self-employed individuals to utilize certain strategies to get ahead of the ball on their annual tax liability. There are many strategies that can be used, and you should consult a tax professional on the best way to plan ahead for your particular situation, but here are a few suggestions to help you get started.
1. Save a portion of each check
The easiest way to not get upset about how much of “your money” The Taxman takes each year is to not think of it as “your money” in the first place. I recommend that my self-employed clients put a certain percentage of each check they bring home directly into a savings account, or other account that they plan not to touch until tax time. Essentially, this is the government’s money, they just haven’t come for it yet. Put it somewhere you know you won’t spend it until it’s time to hand it over to The Taxman, and you might even earn a little bit of interest on it in the meantime.
2. Track those expenses
Frequently, my clients who are new to the self-employment game haven’t adequately tracked all of the expenses that they could be writing off. If you’re self-employed, don’t forget to keep track of things like your mileage, cell phones bills and how much you’re spending on supplies. Those items, combined with many other expenses you may be eligible to include, will have an effect on your tax liability that is typically advantageous for the self-employed.
3. Make estimated payments
If you’re concerned about your tax situation because of the amount of money you’ve earned from self-employment, you may want to consult a tax professional about making estimated payments to the IRS. Your estimated payments will vary depending on how much you’ve earned, your marital status, and whether or not you work another job that is subject to withholding (just to name a few facets of the calculation). By making estimated payments you can avoid penalties and interest that you may be subject to for underpayment. Additionally, you won’t be tempted to spend that money that has to go to The Taxman, because you’ve already sent it.
There are many blessings and burdens of self-employment. To maximize the blessings and minimize the burdens, self-employed individuals can see tremendous benefit from employing a Bookkeeper and Tax Professional. Let Canavan Financial be your one-stop shop to meet those needs. If you’re not already a client, contact us today to set up a complimentary consultation to discuss how we can help you with your business needs. Call 303-284-1096 or email me directly at firstname.lastname@example.org.