Being self-employed means lots of freedoms: you can set your own hours, choose your own projects and be your own boss. But with self-employment comes taking on many responsibilities that many employers cover, like buying your own insurance, setting up a retirement account, and setting aside money for taxes.
When you’re an employee, your employer withholds money for federal taxes out of your paychecks and sends the money to the IRS, so your anticipated tax bill should already be substantially paid by the end of the year. However, if you’re self-employed, this is a task you have to take care of yourself. Rather than paying weekly, you must make four estimated tax payments during the year, in April, June, September and January generally if you expect to owe $1,000 or more in taxes . Because you’re doing this while the tax year is in progress, you should provide your best estimate based on the income you earn. Keep in mind, in addition to income taxes, you have to pay “Self-Employment Tax”, which covers Social Security and Medicare taxes.
So how do you figure out your tax rate? Before you can determine if you are subject to income tax, you should figure out your net profit or net loss from your business. If you are also working for an employer you should take that income and tax withholdings into consideration too. If your business expenses are less than your business income, the difference is net profit and becomes part of your income. If your business expenses are more than your business income, the difference is a net loss. Don’t worry about making these calculations. TurboTax handles them for you based on your entries. You can also use QuickBooks Self-employed to track your business income and expenses year round and then export your information directly to TurboTax. TurboTax will also help you determine your tax rate based on your income.
When it comes to Social Security and Medicare taxes, employees pay 7.65 percent of their income in Social Security and Medicare taxes with their employers making an additional payment of 7.65 percent. The Social Security portion of the tax is paid on the first $118,500 of employment income in 2016. When you are self-employed, you pay both portions of these taxes — for a total of 15.3 percent. However, you get to claim a deduction for a portion of this when you file your tax return if you are self-employed.
Don’t worry about knowing these calculations. TurboTax will ask you simple questions about your business and give you the tax deductions and credits you are eligible for based on your entries, saving you money for your business.