If you are self-employed you need to pay self-employment taxes. This is true even if you are part-time. These taxes are over and above your normal Federal, State, and City income taxes. If you are used to being an employee, you are used to seeing your check have a deduction for Social Security Tax or FICA and Medicare taxes. Now that you are self-employed, you have to pay these taxes on your own, based upon your annual net-taxable self-employment wages.
It is important that you understand that Uncle Sam does not want to wait until the end of the year to get these taxes from you. You are probably required to pay them on a quarterly base (some people pay them every month).
As you earn money, you can estimate the self-employment taxes that you will eventually owe.
When you file your Federal income taxes you need to submit schedule C or schedule C-EZ and schedule SE. You can get these forms from www.irs.gov/formspubs.
Using schedule C (or schedule C-EZ) you calculate your net taxable income from self-employment. Basically, you estimate the total gross income, which you will receive from your clients or customers for the year, and then deduct your business expenses to arrive at your net taxable self-employment income.
Remember, this is only an estimate of the actual taxes you will owe, but you can use this estimate to set aside enough money so that you will have it when the taxes are due.
If you are not comfortable determining your own estimated taxes then hire a qualified tax professional to help you.
In my experience of representing people all across the country with IRS problems, the majority of my clients are self-employed. When you were a kid in school, there were no classes explaining the pitfalls of having your own business.
Helpful hint: If you find it difficult to do your taxes quarterly, here’s a tip, do them each month. The only problems with doing them quarterly is that you come to a point where you look at that money in the bank and think it is yours, even though you have not paid taxes on it. Many of my clients find it easier to simply pay the tax each month. It is a little bit of additional paperwork, but the upside is, they never get behind.
If you need help with an IRS problem, contact us at 1-877-349-8297