The gig economy has opened the door for those wanting to make extra money on the side or to be their own boss. However, being independently employed doesn’t get you out of paying taxes – and it goes beyond filing with the IRS by April 15. Freelancers making more than $1,000 are required to pay estimated taxes quarterly as well.
“Some new solopreneurs and entrepreneurs are shocked when they have to pay self-employment tax,” explained Ellie Thompson, CEO with Money Therapy, a financial consulting company.
“When you are working for a corporation, taxes like Medicare and Social Security tax are already deducted from your paycheck. As an entrepreneur, you have to account for those on your own.”
For freelancers, tax time isn’t once a year, it’s always on the horizon. Thompson and other tax experts provided the following tips to help you prepare for tax season and beyond.
1. Know your business structure.
What type of structure is your business? LLC? S-corp? C-corp? Sole proprietor? The legal structure of your business not only affects your personal assets, it determines how much you owe in taxes, said Thompson.
“Sole proprietor is a great option, but your personal assets could be in jeopardy if you are sued. A corporation is much more complex and requires additional setup fees, but it protects your individual assets.”
2. Consider hiring a tax professional.
An accountant or CPA who is familiar with freelance taxes could be your best friend come tax time. If your income and filing status don’t change much from year to year, then you might be OK doing your own taxes.
However, most people’s financial situations change often, and as your tax return gets more complicated, you might need help, advised Josh Zimmelman, owner of Westwood Tax & Consulting.
“Filing your own taxes means keeping track of all your receipts and statements and understanding what it all means. Every transaction matters, and if your financials are kind of a mess, then you’re better off paying someone else to sort it out for you.”
Also, remember the IRS is constantly updating their laws regarding taxes, including the huge tax overhaul passed in late 2017. You may need help understanding how these changes impact you.
3. Understand how to estimate.
If you prefer not to use a tax professional, Sheryl Schuff, a CPA who specializes in tax planning and consulting for small businesses, suggested you learn exactly how the estimated tax system works and make timely payments based on the actual results of your business operations for each reporting period.
“Not only will you avoid tax penalties, but you’ll minimize the chances of having a huge tax bill, which you might not be able to pay when you file your return on April 15,” she said.
4. Think daily, not quarterly.
Tax professionals with Alexander & Co. advise self-employed workers to spend time each day focusing on tax-related information, including updating income and expenditures as they come in.
When you keep on top of financials, the records are more accurate, and you aren’t rushing around in panic the week before meeting your accountant.
5. Be prepared for tax day(s).
Since you’ll be paying taxes quarterly, tax attorney Claudia Moncarz recommended setting up a savings account and setting aside a percent of each paycheck for tax payments. “Then when the tax bill comes, you will already have the money saved up,” she said.
How much should you put aside? That’s where tax experts differ. While Moncarz says 10 to 15 percent should be set aside, other experts recommend as much as 30 percent.
Read more: https://www.businessnewsdaily.com/10649-essential-tax-tips.html