Self-Employed Tax Payers
So many workers struggle to understand taxes. Fortunately, a regular worker can rely on their company’s payroll service to calculate their weekly or monthly withholdings for income taxes, Social Security, and Medicare taxes. Most regular employees don’t worry about making estimates during the tax year and they hope they don’t owe any additional money on April 15th. A self-employed worker does not have the benefit of a payroll service to assist in this process.
As a self-employed worker you need to be aware of your tax obligations. The tax filing thresholds are different for a self-employed worker, so if you have $600 or more of income you must file. You may not owe any income tax, but you will owe self-employment taxes (both your Social Security and Medicare tax). So many self-employed workers forget that they must pay both the employer portion and employee portion of that tax. This equates to approximately 15% of your income.
One of the biggest challenges for a self-employed worker is how to calculate the amount of tax to pay and where to make the payment. This often means no quarterly payment is made. This can be costly at tax time and may result in hefty penalties as well as interest. As accountants, we can help calculate what needs to be set aside each month so when it is time to make a quarterly estimate, our self-employed client will have enough money to make their payment. We also need to direct them to the simplest place to make that payment, www.irs.gov/payments.
As accountants we also need go beyond just preparing a tax return in the spring and waiting until the next filing season to connect with our clients. We need to offer advice to our clients year-round. Many clients are scared to reach out during the year for fear it will be costly. However, since so many self-employed workers do not have consistent earnings throughout the year, it is hard to predict in April where their income may end up at year end. Consider including in the tax preparation fee a mid-year and year-end check in for the estimates and other tax questions. This will give support to your clients that are unsure how to re-evaluate their income throughout the year.
Some simple, proactive planning during the year can save clients from the stress of making estimated payments and will help ensure they will not owe any additional penalties or interest. This will also help ensure that self-employed clients properly file and report their income and expenses, which in turn helps prevent a future audit. Some simple planning can help your client save money and focus on what is most important to them— their business.