Understanding Taxes When You're Self-Employed

March 29, 2021 by First Federal Bank

self-employedIf you’re new to the world of business ownership, managing your taxes can be one of the most daunting aspects of self-employment. Dealing with estimated taxes, figuring out deductions, and navigating tax forms can dampen the spirits of even the most intrepid entrepreneur. To help you prepare, here are a few things to know about the unique tax circumstances you deal with when you’re self-employed:

What to know about estimated taxes

Unlike the taxes taken out of a traditional paycheck, paying your taxes is a little more complex when you’re self-employed. That’s because you have to pay estimated taxes on a quarterly basis. These payments will be due on the 15th of January, April, June, and September, and if they’re not paid on time, you’ll be charged a penalty. That said, if you owe under $1,000 or didn’t owe taxes the previous year, TurboTax explains that you may not owe anything during the current year. However, consider checking with a tax professional before you assume you’re off the hook.

Figuring out your self-employment taxes

Whether you host a blog or own a small retail establishment, being self-employed means paying self-employment taxes. You’ll still have to pay self-employment taxes even if you consider your business a side gig but earn the bulk of your income via traditional employment. Your self-employment tax will be calculated based on the income you earn via your business. According to TurboTax, this figure includes both the Medicare and Social Security taxes, which you’ll pay as both the employer and employee. On top of that, it’s still due whether or not you owe federal income taxes.

Know your deductible expenses

When you run a small business, you can take necessary expenses off of your taxes. Common deductions include advertising, computer equipment, office supplies, rent for your brick-and-mortar, and items you need to perform the service or create the goods you sell. And according to TurboTax, if you use a portion of your home as an office, it’s possible to get a deduction for that space. However, this is a complicated process, so it’s best to consult with a professional before claiming this deduction. Furthermore, if you’ve purchased large equipment or a vehicle, you can depreciate or amortize the expense over several years. And for new entrepreneurs, Investopedia contributor Amy Fontinelle explains you can deduct up to $5,000 in startup expenses for your company. These expenses include market research, filing fees, consultant costs, and lawyer fees.

Is your business a hobby?

If you have a list of deductible expenses, you can’t necessarily bank on getting those deductions. TurboTax warns that the IRS won’t allow tax deductions if it classifies your company as a hobby. To prove you’re running a real business, your company must have earned a profit for at least three of the last five tax years. TurboTax also says the IRS is more inclined to consider your company legitimate if you depend on the income earned via your business, invest lots of time into your enterprise, and have the potential to earn profits in the future.

Entrepreneurship can bring joy and a sense of achievement to your life, but managing your taxes is one of the less enjoyable aspects of self-employment. If you need a little help navigating tax time, an accountant or other tax professional will be able to give you the guidance you need.

 

Categories: Entrepreneurship, Taxes

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