If you are new to business, or don’t already have your self-employment tax system set up, this post is for you. Many entrepreneurs treat taxes as an afterthought, often because cash flow is tight, and they don’t set back personal taxes when they take a paycheck. In the US Self-employment taxes are Social Security and Medicare taxes, like those that are withheld from when you are employed. When the IRS speaks to self-employment taxes, it is referring to this type of tax. There may be additional taxes that business owners and self-employed people have to file.
The rates for self-employment taxes may seem high when you first start paying your own. For the 2019 tax year the self-employment tax rate is 15.3% of net earnings, meaning after your expenses. The truth is that the employer must pay about ½ of the tax expenses for their employees. So, generally the same percentage is paid by everyone, but if you are employed you pay half (7.65%) and your employer must pay the other half (7.65%).
You must withhold your taxes and deposit them at least quarterly, and this is where many small business owners run into problems. The rules don’t allow for self-employed people to just pay annually, you must deposit quarterly, or you can face late-payment penalties. Here is a simple process for setting up your tax system for a successful 2020.
- Pay Regularly Online. You can easily set up to deposit your taxes online through www.EFTPS.gov by enrolling in the program and receiving a PIN from the IRS, and can deposit your taxes online whenever you take a paycheck. You don’t have to pay them quarterly, just make sure what you paid in each check totals what you owe by the end of the quarter. If you always deposit 20%, this shouldn’t be a problem. This is what I do, I don’t hold back and deposit quarterly anymore. I deposit online every payday.
- Write Yourself a Paycheck. The easiest and best way to track your income, and the amount you must pay taxes on, is to write yourself a paycheck. When you just take money out of the till and spend it, it becomes a tracking and accounting nightmare. If you get into the habit of writing yourself a regular paycheck, and immediately withholding your self-employment taxes, you will simplify your accounting and reporting for the end of the year and keep yourself protected from tax issues. You can join the movement of entrepreneurs who have committed to pay themselves a paycheck in 2020 by visiting www.entremoneycoach.com/payday.
- Stay organized with your expenses. Your self-employment taxes are calculated on your NET income, meaning after expenses. Keep your receipts organized, perhaps in an envelope by month, and put the total on the outside of the envelope for each month. You can very easily keep a running total of your expenses on a sheet by totaling the expense envelopes. This doesn’t need to be complicated!
The rules for reporting self-employment income are straightforward. If you are a sole proprietor or a single member LLC, you must report your self-employment income and pay taxes using a schedule C when you file your 1040. If you have a corporation or an LLC with more than one member you must file a different form. Staying organized and regularly handling tax deposits will make your 2020 tax year simpler and less stressful.