Tax Tips for the Self-Employed
Self-employment offers you the freedom to work when you want, and the potential to earn more money than in a salaried job. It also offers the burden of paying your own taxes.
Someday, you might be able to clone yourself; but for now, you'll just have to keep multitasking. As you navigate the world of self-employment, balancing your roles as strategic planner, sales person, and customer service rep, don't forget to find the time to manage your tax planning responsibilities. Here's a short and sweet list of tax tips to help you stay on track.
- Invest in bookkeeping software. You're required to make quarterly tax payments if you expect to owe $1,000 or more when you file your return. Since it doesn't take much to owe $1,000 in taxes, those quarterly payments are a necessary evil for most self-employed individuals. You'll have a far easier time estimating your quarterly payments (and preparing your year-end return) if you have your records organized with bookkeeping software. Microsoft, Quicken, and other brands sell programs designed exclusively for sole proprietors.
- Set reminders for your quarterly payments. Create a system to notify yourself of the due dates for your quarterly tax payments. If you use task management software, for example, set it to remind you at the beginning of April, June, September, and January to send out the payments that are due on the 15th of each of those months.
- Check in with www.irs.gov. Visit the IRS website on occasion to make sure that you understand how you're being taxed and why. You should already know that the self-employment tax rate is 15.3 percent, but you might not know that 12.4 percent of it is Social Security and the rest is for Medicare. The site also specifies the maximum earnings amount that's subject to each of those two taxes.
- Establish a retirement plan. Contributions to qualified retirement accounts will reduce your tax bill and help you save up for the future. Several accounts are designed specifically for the self-employed, including the SEP IRA, Keogh profit sharing or defined benefit plan, and solo 401(k). If you have employees, consult with a benefits advisor before you select a retirement savings program; with some of these accounts, regulations mandate that you make contributions to your employees' accounts when you contribute to your own. Also, contributions may be limited by a percentage of your self-employment income; make sure that you know these limitations and develop a system to stay within them. Here again is another reason to use financial management software to keep your books-you won't know what you can contribute if you don't have a running tally of what you're making.
Remember that paying taxes is a good thing, because it means you're making money. Keep up that multitasking, and congratulate yourself on a job well done every time you mail off a quarterly tax payment.