Being independent is generally great. Now that you’re in charge, you’re in control: you choose your projects, set your hours, and when things go well, you reap the rewards.
But every rose has its thorn. And for the self-employed, tax time can be quite tricky.
When you plant your flag as a freelancer, contractor or self-employed small business owner, the IRS will sit up and take notice.
When you worked for wages, you hated those little rows of numbers at the bottom of your paycheck – why are they withholding so much? – but now that you’re responsible for keeping track of all your income tax (not to mention the self-employment tax), you actually miss the good old days when your boss withheld taxes.
Keep your head up! You got out of the rat race for a reason, and paying taxes as a solopreneur doesn’t have to be any more complicated than when you worked for a paycheck. Yes, paying taxes means paying attention, and keeping all your receipts is a pain, but in just a few minutes (okay, maybe more like an hour) you can learn everything you need to know to keep the IRS away.
The first step? Find out if you have to pay quarterly or annually.
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Four times the fun! (well, maybe not)
From the official website of the IRS: “As a self-employed person, you generally must file an annual return and pay estimated taxes each quarter.”
The IRS defines individuals as “self-employed” if they conduct business as a sole proprietor or independent contractor, if they are members of a business partnership, or if they earn direct income as a freelancer. As a solopreneur, you have to pay your good old income taxes like self-employment tax (SE), which represents your contribution to Medicare and Social Security.
As you probably know, the tax authorities Loves rules and regulations. And just as they have rules to determine who is self-employed, they have another set of rules to help determine who must file and pay their taxes each quarter.
Bottom line: If you’re self-employed, you probably have to pay estimated taxes four times a year. Some individuals may be exempt from quarterly reporting (if your company has a net loss of income, if you have been inactive for an entire year, or if you have earned less than $600 from your business), but if you have been in business for 12 months and if you are earning income from your business, then it’s time to get started with your quarterly estimated taxes.
Estimate taxes are exactly what they sound like: Using last year’s return and the worksheet in Form 1040-ES, you pay about a quarter of what you expect to owe the IRS at the end of the current year. If you pay too much, you’ll get your money back when you file your return in April, but if you pay too little, be prepared to spend extra money in the spring.
And most importantly, make sure you pay your quarterly taxes on time. If you report late, the IRS will penalize you at the end of the next quarter and the fines can add up quickly.
Filing your annual business tax return
As a self-employed person, you still have to file an annual return. Yes, this means another round of forms, but look on the bright side: if you filed quarterly, you won’t this time be guilty give them something, and you might even get something back!
Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax or accounting advice. If you have specific questions about any of these topics, seek advice from a licensed professional.
