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Anne Powelson (AP) Anne Powelson (AP)
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Oops, I'm self-employed

February 10, 2015
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Some people dream of opening their own restaurant, running a construction company or developing a killer app. Others fall into self-employment when they agreed to lead lessons on a favorite topic, perform beta testing for a software company or install wiring at a house construction site. Planned or not, being self-employed is an entry in to a whole new level of taxes. If you find yourself self-employed here are some things to watch out for:

It's not your imagination; taxes are a bigger bite than before

You don't just owe income taxes on your money, you also owe self-employment taxes. Self-employment taxes are the equivalent of Social Security and Medicare taxes. If you are on a payroll firm, your company pays for one-half of your Social Security and Medicare taxes. When you're self-employed, you pay both halves.

No one withholds taxes for you

The government was pretty smart when it began payroll withholding in the 1940s. It's much easier to pay taxes a little at a time. As a self-employed person, you may need to submit quarterly payments. If you or your spouse still have a payroll job, additional withholding there might also cover your self-employment tax liability.

Record keeping becomes very important

With self-employment income, you are far more likely to be audited. So you need to find a way to keep good records of your income and expenses. Ideally, you'd have a separate bank account where all the income went in and expenses went out, but that's generally not very practical in real life, mainly because you need money to live on. Other recommended methods are careful ledgers or entries into bookkeeping programs. The IRS offers a publication, '583,Starting a Business and Keeping Records,'which offers guidance on record keeping. If those don't appeal, try keeping two bags under the sink and throwing income receipts into one and expense receipts into the other. Anything is better than nothing.

You'll probably be using your car for business

Whether you opt for actual expenses or standard mileage, using your car can provide significant write-offs, but again, record keeping is important. In both cases, the first step is to determine how many of your total miles driven in the year are business miles. For each business trip you should record business purpose, location and miles driven. For some people, keeping a notebook in the car works; others find they can annotate the locations on a calendar or appointment book and then look up the mileage using Mapquest or a similar program. A good habit for self-employed people is to annotate the mileage on their car on Jan. 1 of each year. That way you have an automatic record of total miles driven for the year.

Seek guidance when you start your business

One resource is'IRS Publication 334,Tax Guide for Small Business.' Even better is to talk to someone familiar with businesses of your type about how records can help you at tax time.

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