3 Things to Know About Taxes if You’re Looking to Become Self-Employed

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Looking to work for yourself instead of an employer? Read on to see how that might impact your tax situation. 

The decision to become self-employed isn’t one to take lightly. When you go the self-employment route, you give up a steady paycheck for what could be an extremely variable income. That could make it a lot harder to budget and cover your expenses.

You should also know that becoming self-employed could result in quite a few changes from a tax-filing perspective. Here are a few things you should know.

1. You may be privy to extra tax breaks

When you’re self-employed, you get to deduct expenses you incur that make it possible to earn money. Racked up a $100 credit card charge for materials needed for a recent work project? That bill could be tax-deductible. The same holds true for services you pay for that enable you to do your job, like an internet connection.

That said, you do need to keep meticulous records when you’ll be deducting self-employment expenses on your tax return. And you may want to consult an accountant before claiming deductions you aren’t sure about. The last thing you want to do is risk an audit because you took a deduction the IRS thought looked suspicious.

2. You’ll have to pay the IRS as you go

When you’re a salaried employee, your paychecks represent your take-home pay after taxes have been withheld for the IRS. When you’re self-employed, you get paid your wages in full. And so it’s on you to send the IRS money every quarter in the form of estimated payments.

Estimated payments are due in April, June, September, and January. Usually, they’ll be due on the 15th of the month, but if the 15th falls out on a weekend or holiday, the deadline usually gets pushed out to the next business day.

3. You’ll be on the hook for self-employment taxes

It’s not just income tax you’re liable for as a self-employed individual. You also have to cover self-employment taxes.

Salaried workers have FICA taxes to cover Social Security and Medicare taken out of their paychecks, and their total tax burden there is split with their employers. When you’re self-employed, you have to pay all of that FICA tax, or self-employment tax, yourself.

Now, the tax rate on Social Security is 12.4%, but that only applies to wages up to a certain limit that changes annually. This year, that limit is $160,200. You’ll also have to pay a 2.9% Medicare tax on all of your income.

Know what to expect

From a tax perspective, being self-employed can be both a positive thing as well as a negative one. So the most important thing to do is know what to expect. And also, find yourself an accountant who can help you maximize your tax breaks while helping to ensure that you make all of the required tax payments you’re supposed to.

An accountant, for example, can help you calculate your estimated quarterly tax payments so you’re paying the IRS the right amount based on your income. They can also advise you on ways to lower your taxes without putting yourself at a higher risk of an audit.

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