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A good accountant can help you work around all of these.
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If you’ve recently become self-employed, you’re in good company. An estimated 16 million U.S. workers identify as being self-employed, according to Pew Research Center.
There are many benefits to being self-employed, such as getting to set your own hours and enjoy the freedom of being your own boss. But self-employment can also be challenging when it comes to paying taxes. Here are a few hiccups you might encounter.
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1. Not having taxes deducted from your earnings
Salaried workers commonly have taxes deducted from their earnings so that by the time their paychecks hit their bank accounts, they don’t have to worry about owing a portion of that money to the IRS. When you’re self-employed, that doesn’t happen. And so when you bring in money, you may not know how much of that is actually yours to spend. That can be an unsettling feeling, and it can make it very difficult to budget out your living expenses.
2. Struggling to calculate estimated taxes
When you’re self-employed, you’re required to pay taxes to the IRS as you earn money in the form of quarterly payments. But it’s on you to estimate how much you owe the IRS each quarter. And that can be difficult, because it’s not just your job-related earnings that need to go into that number. Rather, it’s your total income picture, including things like capital gains in your brokerage account and interest income from your savings.
If you underestimate your quarterly taxes, you’ll end up having to write the IRS a check. But overestimating your quarterly taxes isn’t great, either. It could mean denying yourself income for bill-paying purposes and struggling financially because of that. And in some cases, paying the IRS too much in quarterly taxes could leave you having to rack up a balance on your credit cards in the absence of having pocketed the money you were entitled to.
3. Owing money at tax time
It’s pretty common for people who are self-employed to end up owing the IRS money during tax season. This isn’t necessarily a terrible thing if it’s something you plan for. But when you’re new to self-employment, it could throw you for a loop — especially if you don’t actually have the money to pay your tax bill in full.
Get help if you’re self-employed
When you’re self-employed, there’s a lot on your plate. You have to work hard to generate income and manage your time and schedule, not to mention oversee your tax situation.
That’s why it’s so important to team up with a great accountant if you’re making the jump into self-employment. An accountant can help you estimate your quarterly taxes based on your broad financial picture, and they can also help you take steps to try to minimize your tax burden.
If you’re not sure how to find a good accountant, one of the best ways to go about it is to talk to the people you know who are also self-employed. Ask them for recommendations, and then interview accountants to get a sense of how much they charge and how they work.
Taxes can become very complex when you go from being a salaried employee to working for yourself. So it pays to get help to avoid mistakes that hurt you financially or make your life more stressful than it needs to be.
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