One of the best things you can do at the start of your new business is to plan for taxes now; not only does this give you the benefit of being organized so you don’t feel overwhelmed when taxes are due, but it means you can take advantage of the several tax deductions and benefits that are available to the self-employed as well as avoid penalties and fees that come from knowing how self-employed taxes work too late.
What are your tax obligations as a self-employed business owner or contractor?
As far as the actual, quantitative taxes go, self-employed people are responsible for income tax, just as they were when they received a paycheck for salaried or hourly positions. However, you are also responsible for what most people call the self-employment tax, which includes Social Security and Medicare taxes that a company would typically take out for you. There are several different circumstances in which you might not be responsible for these taxes, such as if your business faced enough loss throughout the year, but under general circumstances, you are not just responsible for calculating your income taxes anymore.
Additionally, these two different sets of taxes, self-employment tax and income tax, will need to be estimated quarterly. Using a Form 1040-ES, you would calculate your estimated total tax for a given quarter. This can be tricky, especially at the beginning when profit and expenses are inconsistent and you’re not quite sure what can be considered deductible or what all factors to take into consideration. This information and expertise come with experience, but if you have an accountant or tax expert, you can take advantage of their experience and know-how as you’re learning the ropes and focusing on your business. So while there are numerous factors that might impact your total tax obligation, if you pay self-employment taxes for a given year or quarter, or what all information you choose to report, there are two general rules to keep in mind when you’re filing your taxes: one, your annual tax filing will include income tax, Social Security tax, and Medicare tax; two, this information should be estimated quarterly.
Filing taxes as a self-employed individual can be tricky. Work with a professional at Roberts Tax Advisory to help get you started as you focus on starting and growing your business.
