What You Need to Know About Self-Employment and Taxes

Self-Employment and Taxes www.ladybossloot.com
“In this world nothing can be said to be certain, except death and taxes.”
– Benjamin Franklin

Only Two Things In Life are Certain: Death and Taxes

If there was one good thing that came from working for someone else, it was the fact that they withheld your income taxes and sent it to the government on your behalf.

Right around January, your W-2s would start to roll in and you could just copy those numbers, input any additional deductions into Turbo Tax, and voila – taxes were done!

Well, my friend. Remember that feeling when you were so happy and empowered about leaving the 9 to 5?

How good it felt to go full-time, working remotely and doing something that really interested you?

Saying, “HA!” to the morning traffic news report as you walked to the kitchen for your second cup of coffee — right before you hopped on your conference call in your footie pajamas?

Hold on to those feelings …

As good as all of these self-employed perks can be, we occasionally have some pain in the you-know-what issues we have to take care of.

Taxes.

What used to be a once a year nuisance, has now become a four-times a year nuisance.

So what the heck does that mean?!

I’m not gonna reinvent the wheel here because there are a ton of places to find the complete information needed to pay your taxes. For more in-depth information on paying Income taxes and Self-Employment taxes – which are made up of Social Security and Medicare – visit the IRS.gov Self-Employment Center.

 

But Wait, How Do You Know What to Pay?

Don’t freak out.

Luckily there are tools to help you figure out your estimated payments. These are based on your tax status, deductions, current income, and your previous year’s W-2 (if applicable).

What am I using this year?

Quickbooks Self-Employed. Hooah! (you like that Army reference? That came out of nowhere…)

Not only does that link get you half-off your subscription, it’ll save you some confusion and headache from trying to calculate everything yourself.

This program helps you estimate what you’ll owe (they actually say they estimate high because they’d rather you get a refund than have to pay any underpayment penalties), then you can push that info directly to Turbo Tax or print the information.

If for some reason you have the need to control everything or know exactly how the numbers work, you can figure your estimated tax using Form 1040-ES.

Also, my best practices include having a separate bank account for me to funnel my tax savings into so that I’m not tempted to spend it during the quarter. This doesn’t have to be anything complicated, just open up a savings account at the same bank as your business checking account.

 

Wondering Where or How to Pay?

Enroll for a free PIN and password at eftps.gov to pay online for free. Alternately, you can mail your payment with a check and your quarterly voucher – the mailing address depends on the part of the country you live in and you can find the details here. Just find your state on the list.

You can also make a tax payment by calling their voice response system at 1.800.555.3453.

Note: It takes 5-7 business days to receive your PIN in the mail, so give yourself ample time if you plan to use the online system for paying. If there is not enough time, pay by phone or mail your check – postmarked by the due date.

 

Lastly, When Do You Pay?

Put these dates on your calendar so you don’t miss any due dates.

Income Period

Due Date

January 1 – March 31

April 15

April 1 – May 31

June 15

June 1 – August 31

September 15

September 1 – December 31

January 15 (of the following year)

 

What If You Missed a Payment?

Missing quarterly deadlines, even by one day, will mean accruing penalties and interest. The rate of interest is tied to the market rate of interest.

So no, don’t just wait until the next one – pay it as soon as you remember.

If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

I’m not exactly sure how much this penalty will set you back because the IRS website is super elusive and vague about it. Here’s what they say:

 

“GENERALLY, MOST TAXPAYERS WILL AVOID THIS PENALTY IF THEY OWE LESS THAN $1,000 IN TAX AFTER SUBTRACTING THEIR WITHHOLDINGS AND CREDITS, OR IF THEY PAID AT LEAST 90% OF THE TAX FOR THE CURRENT YEAR, OR 100% OF THE TAX SHOWN ON THE RETURN FOR THE PRIOR YEAR, WHICHEVER IS SMALLER.”

 

They sure do have a way with words don’t they?

Basically, if you miss a payment, they can charge you interest on it (at market rate of course), and you may be able to avoid it based on the amount of taxes you currently owe. Also, you can try to appeal the penalty charges, and if they’re in a good mood, your wishes may be granted.

 

Take Home Story

So, have you been keeping up with your quarterly taxes?

If not, get your ducks in a row and get caught up (on your knowledge and your payments).

TIP: Set aside money from each paycheck to make sure you have enough come payment time (15-25%). The amount depends on your deductions and tax bracket. If this is your first year, keep note of how much you set aside and whether you receive a refund or owe money at the end of the year. Adjust accordingly for the following year.

I know it can be confusing at first glance, but if you file electronically, input the numbers as accurately as possible, and submit it all by the due date, you should be fine.

Download this Tax Preparation Checklist so you’ll be ready next quarter!

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