Self-employed individuals have a unique set of tax circumstances, ones very different from those of employees. If you are starting your own business or are otherwise self-employed, there are a number of tax provisions you should be aware of. Here’s a beginner’s tax guide for self-employment.
Federal Self-Employment Taxes
If you were an employee previously, you no doubt paid into social security and Medicare by having what’s commonly called FICA (Federal Insurance Contributions Act) taxes deducted from your paycheck. Your employer would match those deductions to arrive at the full amount required by the IRS.
Now that you are self-employed, you need to pay not just the employee’s share but the employer’s share, too. These are collectively called self-employment taxes. The social security portion of the taxes (which equals 12.4 percent in 2018) is assessed up to a certain level of income ($128,400 in 2018). The Medicare portion in 2018 is assessed at 2.9 percent up to a certain level, rising to 3.8 percent after that – with the level depending on whether you are filing singly, jointly, or married filing separately.
Quarterly Estimated Federal Income Taxes
Since taxes aren’t being deducted from any regular paycheck, the IRS requires you to submit quarterly estimated income tax payments. This may be somewhat of a guess on your part, but it’s important that you make these payments if you believe you will owe more than $1,000 in taxes in any given year.
It’s also important to make payments equaling at least 90 percent of what you actually owe. That way you will avoid any penalties for underpayment. Typically, to be safe, you might make four equal payments totaling 100 percent of your previous year’s tax payments, unless you know you’re going to be making a lot more this year than last, or you have a big jump in income in any given quarter.
State & Local Taxes
Most states and many localities also require you to pay quarterly estimated income taxes. Don’t forget state sales tax on goods sold and services rendered, too. Check with your state treasurer to see what the statutes are in your state.
Additionally, many cities and other local governments want you to pony up for a payroll tax, business privilege tax, or any number of other business taxes. Your local taxing authority will be happy to help you make sure you’re paying all the taxes you need to.
So that you’re not paying more in taxes than you owe, make sure that you’re aware of all the business expenses you can deduct from your income. If you have an office in your home, you can deduct a number of expenses, such as business equipment and supplies, repairs, and a portion of certain utilities and insurance. Be careful, though. The IRS has very specific rules for what does and doesn’t qualify as a home office.
You may also deduct expenses associated with your car or travel, advertising and marketing, and subscriptions and memberships to professional organizations, among others. To ensure that you’re getting all the deductions for which you’re eligible, you should consider consulting with a knowledgeable accountant.