Being your own boss can really seem like the dream. You make your own schedule, travel when you decide, run your business how you see fit, and report to yourself. That all sounds wonderful. The part that often goes unnoticed is that you handle your business’s finances, retirement planning, healthcare planning, tax planning, and ultimately act as HR.
And don’t forget: there’s no one to blame when a box goes unchecked. You work for yourself.
It’s early 2022 at the time of writing and self-employment has skyrocketed. According to the US Bureau of Labor Statistics (BLS), August 2021 recorded 10.2 million self-employed individuals in the U.S., the third highest month ever recorded. This means individuals who were part of the 6% increase in self-employment we saw in 2021 are doing their taxes now for the first time since their career change. What does this mean? It means 1099s, withholding your own taxes, and a lot more weight on your own shoulders. What’s the best way to withhold your own taxes? How do you know how much you should plan to put away? Find out here.
Taxes for Self-Employed Individuals
When an employee receives their paycheck, they’ll see their employer has already withheld a certain amount for social security, federal income tax, medicare, and state income tax. As a self-employed individual, you’ll need to make all of the same withholdings. In addition, you’ll need to cover the portion of Medicare tax that your employer would typically pay. Since you’re acting as both employee and employer, both fall on your shoulders. This grand total is referred to as “self-employment tax” and adds up to 15.3%. Click here to see how the IRS breaks down the self-employment tax.
Estimate The Taxes You’ll Owe
From here, it’s fairly straightforward determining what you’ll owe. If you’ve kept detailed, accurate records of your income and expenses, you’ll be able to simply deduct your business expenses from your overall income. So if you brought in $40,000 and spent $5,000 on your business, the remaining $35,000 is the part that would be taxed. You take 15.3% of that remaining number and you have your answer.
Again, this is fairly straightforward, if you’ve kept accurate and detailed records. If you’re planning on making deductions(which you definitely should), you’ll need a detailed record of all of it. This self-employment tax calculation isn’t something you’re going to want to do annually, but at the very least quarterly. Depending on your income, there’s a good chance you’re required to make annual estimated tax payments to the IRS.
Figure Out if You Need to Make Estimated Tax Payments
The IRS states the following concerning who is required to make estimated tax payments:
“Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
You may have to pay estimated tax for the current year if your tax was more than zero in the prior year.”
How Much Should Your Quarterly Tax Payments Be?
The IRS provides Form 1040-ES to figure this part out. You’ll need to take your gross income, subtract the deductions you plan on making, and then take 15.3% from that final number. You can make these payments online, by mail, or over the phone.
When to Make Estimated Tax Payments
Quarterly estimated tax payments are due the following dates:
- April 15th for profits from January 1st to March 31st
- June 15th for profits from April 1st to May 31st
- September 15th for profits from June 1st to August 31st
- January 15th for profits from September 1st to December 31st
Time is Money
We all know how it goes: time is money. As a self-employed individual, every minute counts. Spending too much of your time on something is money lost. Don’t spend any time wondering throughout the year what your taxes are going to look like, what deductions you might be missing out on, or what questions you’ve left unanswered. Contact Chris Haro CPA today for the best tax preparation for self-employed individuals.