Fresh when it gets here from
Julie Barrett
Tuesday, April 15, 2014
Finally got all my taxes finished, filed, and accepted by the IRS. Then today I realized I'd forgotten all about making a quarterly tax payment. Fortunately, today is the deadline. I guess there are worse things that could happen.
This morning I ran across an
article by Bob Sullivan on the self-employment tax, and how it might hurt America in the next 15 years or so. If you're thinking about freelancing or starting a business on the side, this is a must read.
What most people don't understand when they start out (and sadly, some people who hire contractors don't either) is that the self-employed pay a higher percentage of income taxes. Here's what happens: When you work for someone else, your employer pays half of your employment tax, and you pay the other half. That's your Medicare and Social Security withholding. The total employment taxes are 15%. You get to pay this on top of your income taxes. And if you're not making enough to pay income taxes, you're very likely still going to pay self-employment taxes.
This is why I put away 30-50% of income (after expenses, of course) away for taxes. The amount you set aside may vary based in your family income. See the disclaimer below.* The IRS has all sorts of
complicated helpful forms and publications on
their site.
I always put away more than I think I'll pay. Why? Because freelancing is a "feast or famine" job, and my handmade business is seasonal. Also, I'm overly paranoid when it comes to taxes, and I'd rather have more than I need than be caught short. The leftover money can also provide a small cushion in case of unexpected expenses.
Also keep in mind that you'll be paying taxes on a quarterly basis, which is why you want to set something aside as your money comes in.
When you're determining your rates for freelancing or your prices for goods, keep taxes in mind. You don't want to be hit with a nasty surprise.
*Disclaimer: I am not a tax professional, nor do I play one on TV. Your situation is probably different than mine, and you really should do the math and/or see a tax professional on your own. Your mileage may vary, etc.