Tax season can be scary for new freelancers. Knowing if, when and how much to pay in self-employment taxes is just the tip of the iceberg. You have to plan ahead to have a lump sum of money ready to send to the government. I suggest getting your ducks in a row for the tax year ahead, so you don’t fall into the same situation I did my first tax-reporting year.
I remember sitting with the accountant, talking about how excited I was to see my new business grow. When I didn’t have any quarterly self-employment tax receipts to show him, he point-blank reminded me that I had to give Uncle Sam a cut of my income. Since I’d always filed taxes annually as an employee, I figured I’d send my self-employment tax payments at the same time my return was prepared. That faulty assumption turned into a $200 fine. Ouch.
When to Pay Self-Employment Tax
The government wants freelancers to make payments toward tax liability throughout the year. When you’re first starting out, you need to make quarterly self-employment tax payments in addition to your income or retail sales taxes, and file a return annually. The payments go toward Social Security and Medicare benefits.
I have quarterly tax payments scheduled on my Google Calendar so I never forget to log in to the federal government’s Electronic Federal Tax Payment System (EFTPS) website and send in my share. I do the same for my state’s required taxes, too. If you made $400 or more from your business in a calendar year, you’ll also need to start paying quarterly self-employment taxes. Look into Form 1040-ES for more details.
How Much Will I Pay?
The current tax system is based on how much income your business accrues, minus its expenses. I currently pay 20 percent of my gross income to the government. For perspective, if I get paid $100 to do a job, $20 comes off the top for self-employment tax. Then, work-related expenses are deducted from the remaining $80 before it can become part of my paycheck. As a freelancer, making $100 isn’t the same as pocketing $100.
Setting Aside Money
Initially, it can seem daunting to set aside money for yet another payment. After all, there’s retirement to save for and daily operating expenses. However, I’ve found that it’s easiest to save for self-employment tax payments by putting aside a portion of each payment as they arrive.
Every two weeks when I process payroll for myself, I calculate how many paid invoices have come in, and transfer 20 percent to a special savings account dedicated to my quarterly self-employment taxes. That way, when the due dates roll around, the money is ready to go.
When you worked for an employer, all taxes were quietly handled via the accounting department. Unless you scrutinized your pay stub, you probably never realized where a portion of your paycheck was going. Now, as a self-employed individual, you’re responsible for calculating and remitting taxes to the government. You have nearly a year to prepare for a successful 2017 tax season — get to it.