Choosing the self-employed career path gives you a lot of personal power, and as we know, with great power comes great responsibility.
And one of those responsibilities is paying your taxes... But, just because you’ve chosen to shoulder additional responsibilities as a small business owner doesn’t mean that your stress level needs to rise just as much as your commitments have! You can learn how to cover all of your bases without stretching yourself to a breaking point.
One of the reasons tax season can be so stressful is because we try to ignore it for 11 months of the year. Running a business really requires you to be mindful of what and when taxes must be paid, and also how your income affects what you owe.
When you are aware of your tax obligations all year long.... tax season will no longer be a seasonal stressor, instead it becomes a review of what you’ve already done (and saved). For some it can even mean more cash as you may have over-saved... and once you know your true tax obligation you can even sometimes give yourself a little bonus.
As a self-employed person taxed as a sole propreitor, your tax obligation is different than that of a salaried or hourly employee. Your small business must pay social security and medicare taxes, just like any large employer would in addition to the employee tax withholding. The plus side to this is that the employer portion of this withholding is an adjustment to your adjusted gross income.
Now here's some scary numbers if you haven't been saving appropriately....
You can typically expect to pay 15.3% of your income to self-employment taxes: 12.4% for social security and 2.9% for medicare.
Then you will also have your federal and state income taxes that you will also owe on your taxable net income (ranging from 10-45%).
I know 15.4 + 10 - 45% can start to add up to some big and scary numbers... but if you save and plan accordingly paying taxes doesn't have to be big and scary.
This is where estimated taxes come in! It may seem like a pain to have quarterly tax obligations, but it’s actually much better for you and your pocketbook.
If you need help coming up with a number... Saving 15% of your gross is a great start!
So get out some pencil and paper, do a little bit of math and starting saving for your taxes today!!
If you're feeling like you've got a case of the tax season woes - or the small business owner blues.... We’ve created a Facebook Master Group to bring Small Business Owners together to pool their collective experiences and resources to empower each other.
We highly encourage you to head over to our page and say hello, ask your questions, and engage with your peers. Not only is it an invaluable space for camaraderie, if we see a topic coming up repeatedly, or the same question being asked, it cues us in for focus topics in these blogs.
Disclaimer This article presents general information and is not intended to be tax or legal advice. Refer to IRS publications and discuss possible tax deductions with your tax preparer.
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