Economy & Jobs
Thinking About Being Your Own Boss? Here’s What You Should Know About Taxes
Nearly a year ago, I quit my job to become a full-time freelancer. It was a big change, and it made me both excited and nervous.
For months prior, I worked the equivalent of two full-time jobs and stashed money in my emergency fund to get ready for this leap of faith. While I prepared myself financially for the uncertainty of freelancing, however, I completely neglected to do any research on some of the more practical aspects—including my taxes.
Now I know better. So if you’re thinking about quitting the office and being your own boss, read on.
Paying Quarterly Taxes Isn’t Optional
I was completely clueless about my tax situation for the first few months of self-employment. Some of my experienced freelancer friends said they paid quarterly taxes, while others said they didn’t.
When I realized I wasn’t getting consistent information, I went right to the source: the IRS. Its website states, “As a self-employed individual, generally, you are required to file an annual return and pay estimated tax quarterly.”
Somehow I got lost in all the advice and couldn’t see the facts right in front of me. Being new to the process, I had no idea how to estimate or pay quarterly taxes, so I decided to hire an affordable accountant who specializes in helping freelancers. I then learned how to set up online payments and diligently make estimated payments each quarter.
Think Your Taxes Are High Now? Think Again
When I was an employee, I used to look at my paycheck and think, “What are all these deductions? Why do I have so little money left?” It felt as if all the taxes and deductions were stealing my hard-earned cash.
Little did I realize that I’d have to fork over a lot more as my own boss. Those who work for themselves pay the self-employment tax, which consists of Social Security and Medicare taxes. The tax rate for 2014 was 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare.
In a typical job, your workplace covers half these taxes, and you cover the other half. By being your own boss, you have to pay taxes in full because you are both the employer and the employee.
Save, Save, Save
I’ve learned an important lesson about saving for taxes when you are self-employed: Save more than you think you need to save. I owed a lot of money this year, partly because I wasn’t sure how much I should be saving. My income started out small and continually grew. While my savings gradually increased, I still ended up owing more than I expected.
It’s important to keep careful track of your income and save more money when you make more money. Generally speaking, saving 30 percent of your income for taxes is a safe bet, but be sure to talk to a licensed professional to figure out exactly how much you should set aside.
If you’re thinking of being your own boss, use these tips to rock your self-employment and be prepared come tax season. Don’t make the same mistake I did.