An Entrepreneur’s Guide To Self-Employment Tax
A butcher, a baker, or a candlestick maker. There are many types of businesses or trades a solopreneur or Entrepreneur can go into. If you have developed an expertise in one area and can make a living doing this business or trade on your own, then you are in an enviable position because you can be your own boss. Whether you’re a contracted technology worker, solo jewelry designer or freelance writer, always remember you’re a business. And as a business owner, you’ll need to maintain:
- Expense ledgers
- Profit and loss statements
- Accurate, up-to-date financial records
- A detailed record of the money you receive, so you’ll have a better idea of where your business stands financially
This way you’ll have the information needed to file your taxes.
Self-Employed People Must Pay Their Self-Employment Taxes
As a small business owner, you must pay self-employment taxes, including Social Security and Medicare. You must pay taxes on any income over $400 per year, as of 2015. Self-employment are assesses based on a percentage of net earnings. To calculate this tax, and pay it, you must know your business’ net profits. More resources Small Businesses & Self Employed – IRS.gov
Schedule and Keep Current with Your Estimated Quarterly Tax Payments
We have a pay-as-you-go tax system. When you work for someone else, your employer withholds a percentage of your paycheck for your taxes and that money is sent to the taxing authorities on a regular basis. Employees don’t have to worry about their taxes until tax time. As a solopreneur, you’re responsible for paying these quarterly estimated tax payments for your self-employment and income taxes. Failing to make these periodic payments or underreporting your income, may subject you to penalties and interest. Kristi Waterworth Hemmann, a Missouri freelance writer, says that it requires discipline to stay current with these estimated tax payments. She plots out the due dates and write out checks and sends them out on time, even if it hurts. This will make it easier at tax time.
Contributions to Retirement Plans are Tax Deductible
The government wants to help you fund your retirement. Retirement plan contributions are one of the top business breaks for a self-employed person, like a solopreneur. In fact, this may be one of the most valuable business tax breaks available to a self-employed person. If you own a business and have no employees, you should consider an individual 401(k) plan. You can contribute as much as $18,000 in pre-tax earnings to your 401(k) plan, as of 2015 and 2016. If you’re 50-years old, or older, you can add an additional $6,000 to that amount. You’re also able to contribute as much as 25 percent of your net self-employment income into a retirement plan like an SEP-IRA or a Simplified Employee Pension Plan. The maximum contribution is $53,000 for 2015 and 2016.
Solopreneurs are able to write off more business expenses that an employee. You want to make sure you are taking advantage of every deduction you’re entitled to and the best way to find out what those entitlements are is to get TurboTax , It has a comprehensive system to show you what you can save , and right now get coupon codes for TurboTax for the year ahead and save 30% or more . You should learn about the various deductions available for self-employed people, in order to find out which ones are most beneficial. The IRS defines a deductible expense as an expense that is necessary and ordinary for your type of business. Some common business deductions you don’t want to miss should include:
Business use of your home and related expenses, which includes:
- A percentage of the rent
- Internet service
Use of your vehicles for business purposes, automobile expenses or IRA allowable mileage for the tax year.Depreciation of the equipment and property you buy falls into this category also.