If you’re reading this then you’re most likely self-employed of thinking about it. Being self-employed frees up a lot of time and puts control of your future in your own hands. One of the common issues that self-employed people run into is taxes. How much do you set aside? How do you set money aside and what are some things to look out for?
Taxes and self-employment
When you’re self-employed the main tax that affects your overall income is the “self-employment” tax. The self-employment tax is how the federal government collects for social security and medicare from the self-employed. Now there are some stipulations with the self-employment tax and you should go over your taxes with a tax professional to see if it applies to you.
The other tax is the income tax. This is just a tax on the income you make that everyone has to pay. Now, depending on how your business is structured and what your profit and loss look like, you would typically be on the hook for both the income tax and the self-employment tax. This means that you have to but a bit more back than other people.
So now we’ve gone over the taxes that would apply to you as a self-employed person. So how much should you set aside? Should you set 20 percent, maybe more? Let’s take a closer look at how a self-employed person should do this.
Setting money aside
Setting aside money for taxes is a good idea. What the typical self-employed person does is set aside about 30 percent of what they make to cover their taxes. This is just a roundabout number and it could be more or less depending on your state.
You have some options for setting tax money aside. You can put it into a savings account or some other account. You can pay your taxes quarterly as well as annually. There are a lot of options for setting aside taxes as well as paying them.
So what if you’re in a situation where you didn’t set aside enough money. Could you turn to self employed loans to solve this problem? Sure, that’s one option. In the case of an emergency, this would be a good idea. Some good planning can avoid this.
How to pay your taxes
It was mentioned before that paying taxes quarterly is often a requirement as well as annually. There’s a lot of responsibility when you’re self-employed and this is one of them. The IRS is a great source of information about quarterly taxes.
Quarterly taxes cover the SE tax and annual cover the income tax. There is a form, 1040 ES, which can be found on the IRS’s site that can help you figure out the quarterly tax. Once this is figured out and you have a system for setting aside money, everything else gets easier.
Quick example
Let’s say that you make $20,000 per year and you want to make sure that you have enough set-aside. You decide that 35 percent fits better than the recommended 30 percent. So it comes to about $7000. This should be enough for the SE and income tax.
Now you would be taking this out every month, meaning that for $20,000 you would make about $1666.00 per month. So put 35 percent of that aside and you’ll be fine. That way you can hit your quarterlies and put the rest aside for income tax for the annual.
Even with this little example, it can get a little confusing. This is why you should consult a tax professional when deciding to set money aside. This way you can make sure that you’re setting enough aside. Now if all else fails and you really need the funds, then it might be a good idea to turn to self-employed loans.
Conclusion
Being self-employed is great. You can control your own income, be your own boss, and control your own path. The downside is that the federal government will make sure that it gets its money. Not only do you still have to pay an income tax but you might have to pay a self-employed tax as well. This can add to quite a bit of money, in some cases about 30 percent. If you follow the tips listed above you’ll be able to cover your taxes, set them aside, and follow your dream