Advice on the tax obligations of the self-employed

The number of people who work for themselves continues to grow …

That means millions more Americans are responsible for filing self-employment income and keeping track of the taxes they owe.

Preparation of the corporate income tax return can be difficult for new entrants to the ranks of the self-employed, as self-employed taxpayers have to account for their earnings and pay the taxes they owe on time. It is one of the responsibilities of working for yourself, to manage your tax obligations, because no employer withholds the necessary amounts from each paycheck to send to the Internal Revenue Service.

Even before the 2020 global pandemic left millions looking for work, trends revealed a increase in the number of workers reporting some type of self-employment income, according to Forbes. The Forbes Report noted that 44 million, or more than a quarter of American workers, identified some type of self-employment before the pandemic.

As millions of Americans turn to some form of self-employment for their income, they must learn how to manage the self-employment tax as well as the income tax on their income. This is why it may be useful to seek the advice of a tax professional to ensure that all income and business deductions are properly accounted for and that all necessary taxes are paid to the IRS on time.

For example, the self-employed are responsible …

for setting aside part of their income to cover Social Security and Medicare taxes that are usually withheld by employers. A worker’s employer pays half of social security and health insurance taxes, or just under 8% of a worker’s gross income. But a self-employed person is responsible for paying the full 15.3% tax, which is equivalent to a tax of 12.4% on gross income paid to Social Security and 2.9% to Medicare.

The payment of the self-employment tax covering social security and health insurance is necessary for taxpayers whose salary comes mainly from their own work. However, employees who work for a full-time business that regularly deduct these taxes from their paychecks may have additional self-employment income that does not require more Social Security and Medicare tax payments. But you should check with a tax professional to determine if the amount of your self-employment income requires additional withholding.

It is important to set aside a portion of self-employment income to cover tax obligations, both for self-employment tax and income tax purposes. The IRS also requires quarterly tax payments for self-employed workers who expect to owe more than $ 1,000 in self-employment tax in a year. These quarterly tax payments, estimate based on expected annual income, have the same purpose as the withholding tax made by the employer of a worker throughout the year. Failure to make these quarterly tax payments may result in penalties imposed by the IRS.