Being self-employed has numerous benefits. It allows you to have more control over your time than you would working for someone else. It makes it possible for you to make a living doing something you enjoy. And it offers unlimited income potential. But when it comes time to pay taxes, self-employment might seem slightly less attractive.
When you work for an employer, you pay half of your Social Security and Medicare tax, and the employer pays the other half. But the self-employed must pay both the employer and the employee contribution. So in effect, being self-employed doubles the amount of tax you must pay out of the money you bring home to about 30% of your income.
Especially in the first few years of self-employment, it can be difficult to estimate how much you will owe in taxes. Your income may fluctuate from month to month, and it may be hard to even come up with an average monthly or annual income to go by. Many self-employed individuals remedy this by putting money away for taxes as they go.
For example, you might set aside 30% of each payment you receive to go toward the payment of self-employment taxes. Or you could figure it up at the end of each week, or even the end of each month. As long as you can keep up with it and you have the money to put back when you need it, it really doesn’t matter too much how you accomplish it.
One problem that some of the self-employed face is the temptation to spend the money they put away for taxes. If it’s just sitting there in your bank account, you might be tempted to spend a little bit of it and put it back later. But what if you’re not able to replace it? If you are concerned about spending the money, put it in a savings account or some other type of account where it won’t be so easily accessible.
If you anticipate owing the government more than $1,000 in taxes for the year, you need to make quarterly estimated tax payments. Otherwise, you could be charged underpayment penalties. Even if you won’t owe that much, you can still make quarterly payments if you think it will help ensure that you pay enough money in.
Taxes aren’t something most of us enjoy thinking about all the time. But when you’re self-employed, it’s important to stay on top of them. If you don’t, you could be in for a rude awakening when it comes time to pay up. By saving money for income tax as you go, you can make sure that there are no unpleasant surprises when tax time rolls around.
