How to File Self-Employment Taxes
If you are self-employed, then filing your taxes is a huge item on your to-do list this time of year.
Not only is it essential that you pay your self-employment taxes on time each year, but you also need to do quite a bit of legwork as well. This work will ensure that you are paying the correct amount of taxes, paying at the correct time, and claiming the appropriate deductions, so you don't overpay.
If you are considering becoming self-employed, you should consider the tax obligations before you take the step. Pay your self-employment taxes by following these easy steps.
Determine Your Entity
Are you a sole proprietor? An S-corporation? A C-corporation? Or an LLC? Before paying your self-employment taxes, you need to firmly establish which class your business falls under, as the tax rules vary by classification.
You'll need to file self-employment taxes if your business made a net profit of $400 or more.
Calculate Your Payment
Next, you'll need to determine how much you need to pay. You can do this by talking to a tax accountant. The accountant can help you determine how much you will owe based on your past earnings or projected profits. The self-employment tax rate is 15.3% and is made up of two parts: 12.4% for Social Security and 2.9% for Medicare.
Self-employed people are also required to pay income taxes. You may also have to pay taxes quarterly if you are self-employed.
If you have been in business for a year or longer, you can determine estimated quarterly payments based on last year's income. Divide what you paid last year by four and pay that much each quarter. Your tax accountant can help you determine if you need to raise or lower this based on your current business projections.
Make Taxes a Priority
As a self-employed person, it's wise to set aside money each month for taxes, so you aren't hit with a huge tax bill—and no money set aside to pay it—come tax time.
A good rule of thumb is to set aside 30% of your income for your taxes for the year. If you have state taxes, you may need to adjust the amount you save to include your state taxes.
How to Pay
The IRS allows you to make payments online through the IRS website. You need to register for a PIN, and that can take a few weeks to process, so you should register well before the payment due date to make the payment on time. You may also mail payments via standard mail.
Make Sure You Pay on Time
It's also important that you pay your taxes on time—or it could cost you. The IRS-imposed failure-to-pay fee is 0.5% for each month—up to 25%—of the amount of unpaid taxes from the due date until your balance is paid in full. This penalty can add up quickly.
Hire an Accountant
Use a reputable CPA and follow his or her advice. While it's never a bad idea to do research and be well-informed on your own—especially as a self-employed person—your accountant can help you save money by knowing certain deductions and rules that you may not be aware of yourself.
For example, you may be able to deduct your retirement contributions, your health costs, and many of your business expenses. This deduction is an important part of making the most of your money.
Consider State and City Taxes
Don't forget about the state quarterly. Your accountant will help you determine the amount you need to pay since the state income tax rate varies from state to state.
Generally, the payments for state income taxes are due at the same time as the federal payments, which can help streamline the process. Be sure to see if you owe city taxes, as well.
- If you are a college student or recent grad, you may be able to deduct your student loan interest.
- If you do need an accountant, you should look for an accountant that you can trust and who will work with you. Ask family and friends for recommendations.
- Be sure to deduct any eligible business expenses when doing your taxes, which can save you money.
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