The millions of taxpayers who hold wage-paying jobs where income taxes are withheld from their checks obviously will benefit from the Internal Revenue Service new tax withholding estimator.
But what if you don’t have a job where there’s withholding? That’s the case for millions of individuals who are self-employed
The work freedom of being your own boss comes with some new tax responsibilities.
U.S. taxes are on a pay-as-you-earn system regardless of whether you get your income from an employer or as an independent worker. So when you work for yourself, you are responsible for the myriad tax implications.
Here are four tax matters that require the attention of self-employed workers, particularly those who get all their income from entrepreneurial enterprises.
1. Pay your estimated taxes.
Income tax payments obviously are top of the list if you earn enough to meet the federal income tax filing threshold.
Be sure to budget for your quarterly estimated tax payments.
See Also: The scoop on paying estimated taxes
Estimated taxes must be paid if you think you’ll owe $1,000 in taxes or more, or if your tax liability was greater than $0 in the prior year. Fail to do so, or don’t make the payments on time, and you’ll end up owing penalties and interest.
There are four estimated tax due dates, but the IRS’ quarters don’t strictly follow the calendar. Estimated taxes are due April, June, September and the following January, usually on the 15th unless that day falls on a weekend or holiday.
2. Account for your SE taxes.
Those estimated taxes also must take into account your associated self-employment (SE) taxes — both the employee and employer portions — that you now much pick up yourself.
SE taxes are the independent worker’s counterpart of the Federal Insurance Contributions Act (FICA) taxes that salaried workers see withheld on their paychecks for Social Security and Medicare.
These tax rates are 12.4 percent for the retirement fund component and 2.9 percent for the federal health care insurance for older Americans.
When you work for someone else, you and your boss split payment of the percentages equally. But when you work for yourself, you must pay both employer and employee portions.
The employer half, however, can be deducted by folks who report their SE income on their annual personal income tax return as an above-the-line deduction.
3. Understand what business structure means.
When you’re self-employed, you can choose the type of business entity for your enterprise. Your selection will affect how you pay your taxes and sometimes the amounts you owe.
The easiest option is to file as a sole proprietor. It’s easy, requires little paperwork and you file your business income on Schedule C or C-EZ as part of your annual individual tax return.
If you have a trusted colleague, a partnership also is a possibility.
There’s also the incorporation option. Incorporating your business provides liability protection. An S corp, for example, can provide more tax flexibility, such as paying yourself a reasonable salary and take some profits out of your company in the form of distributions, upon which you don’t pay FICA tax.
Of course, the various business tax structures can quickly get complicated. Before you make any changes, for tax or other reasons, it’s a good idea to consult a tax and accounting professional.
4. Consider combination earning implications.
If you’re self-employment income is not your full-time job, but simply a way to pick up a bit of pocket money, you’re not necessarily off the self-employment tax hook.
Even if you don’t hit the earnings amount requiring your file a tax return on your self-employment income, you still could owe Social Security and Medicare taxes. These taxes must be paid if you make $400 or more through self-employment enterprises.
In these cases of combined wage and SE earnings, the IRS’ new withholding estimator can help. The new online tax calculator does take into account SE income that you have in addition to a wage-paying job where taxes are withheld.
Regardless of what route your self-employment journey takes, be sure to take these issues into account to make for smoother tax traveling.