If you make self-employment income this year, there’s a chance you’ll need to pay self-employment taxes on that income on your individual tax return. When you’re self-employed, you’re responsible for paying the full 15.3% of the FICA tax instead of the approximately 7.5% you pay when you work directly for another employer. This can create some serious stress come tax time, especially if you haven’t been setting aside additional money to cover these taxes.
By understanding the basics of filing individual taxes as a self-employed worker, however, you can be prepared come tax time!
You Might Owe an Underpayment Penalty
Typically, self-employed workers pay their taxes quarterly rather than all at once at the end of the year. If you fail to make your quarterly tax payments and end up owing more than $1,000 in self-employment taxes by the end of the year, you could face an underpayment penalty on the amount you owe. There are exemptions to this, but if you anticipate owing more than $1,000 in taxes based on your self-employment income this year, it’s in your best interest to pay by the quarterly due dates (in April, June, September, and January).
You Can Write Off Home Office Expenses
If you’re self-employed and have a dedicated home office, this could save you a significant amount in taxes. Specifically, the home office deduction allows you to deduct the expenses related to maintaining your home office from your taxable income. This includes not only the mortgage costs you pay on that square footage in your home, but a portion of home heating/cooling/electric costs, as well as Internet and related expenses.
The caveat? The space must be a dedicated home office with four walls. This means you can’t write off a corner of your living room where your computer desk sits.
Consider a “Pay-as-You-Go” Arrangement Next Year
Paying quarterly isn’t always an ideal arrangement for those with inconsistent incomes throughout the year, which is why the IRS also offers a “pay-as-you-go” arrangement. Through the Electronic Federal Tax Payment System (EFTPS) online, you can submit tax payments monthly, weekly, or even daily if you’d like. This allows you to more accurately estimate and pay your taxes when your income is inconsistent throughout the tax year.
These are just a few pointers to keep in mind if you plan on filing self-employment taxes. For professional guidance with your taxes, contact us today!