Many people dream of quitting their jobs and going into business for themselves so that they can pursue a passion and work without a boss. Self-employment can be a rewarding career decision, but it can lead to higher taxes and tax returns that are more complex that what you initially bargained for.
If you’re self-employed, it is critical to understand how taxes work so you can avoid making a mistake and owing more than your fair share of taxes.
Note: If you owe back taxes and need tax relief, our firm can help! We specialize in resolving complicated self-employed and small business back tax problems. Reach out to our firm today! www.mytaxcoaching.com/contact
Explanation of Self-Employment
The IRS considers you to be self-employed if you work as a contractor, freelancer, small business owner or are otherwise in business for yourself. If your income is earned directly from clients and you don’t have an employer that withholds money from your pay for tax purposes, you are self-employed.
Tax Withholding and Estimated Taxes
If you work as an employee, your employer automatically takes a certain amount of money out of your pay each month to cover your tax obligations. This is called tax withholding.
Self-employed workers do not have an employer to withhold income for tax purposes, so they are responsible for paying their own taxes to the IRS through estimated tax payments. Estimated tax payments have to be sent to the IRS on a quarterly basis if you expect to owe at least $1,000 in income tax at the end of the year.
The due dates for estimated tax payments are April 15, June 15, September 15 and January 15. Failure to plan properly and pay enough estimated taxes during the year can result in a tax penalty and a large surprise tax bill. If you pay at least 90 percent of the tax you owe or 100 percent of the total tax you owed from the previous year, the IRS usually will not assess a tax penalty.
Self-employed workers must pay the self-employment tax (SE tax) which goes toward Social Security and Medicare in addition to normal income tax. Employees split the cost of paying into Social Security and Medicare with their employers, but self-employed workers must pay the entirety of the amount themselves.
We always recommend hiring a professional to handle your taxes and stay compliant, but we especially recommend hiring a qualified tax relief firm if you find yourself behind on any taxes or you’re hit with a large tax bill you can’t afford to pay. Get the professional help you need.
Am I Required To Report Side-Income If I Have A Normal Job As Well?
Individuals with self-employment income must file an income tax return if they have net income from self-employment of $400 or more. In addition, you must report any self-employment income you make during the year on your taxes even if you hold down a regular job.
For example, if you work as an employee year-round but you take on small side jobs to make extra cash, that money must be reported as self-employment income when you file your tax return even if you don’t make enough extra cash to warrant paying estimated taxes.
It’s a common misconception that you don’t have to file or report income if it’s “cash” or if it’s from a side hustle. Not reporting it could lead to more trouble than it’s worth and the IRS will add penalties and interest on top of the taxes owed. Don’t hide it, be up front and honest about it to avoid penalties.
OWE BACK TAXES?
If you know you’re going to owe money to the IRS after filing your return, it’s important to note that only experienced firms like ours are able to handle tax debt cases since negotiating with the IRS requires specialized skills that often fall outside of the scope of most conventional accounting, tax, and tax law firms.
Our firm specializes in tax problem resolution. We have CPAs, EAs and attorneys who can represent you before the IRS. We serve clients virtually so don’t hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a free, no-obligation confidential consultation to explain your options to permanently resolve your tax problem. www.mytaxcoaching.com/contact