Self-Employed? Don't Make These 3 Common Tax Mistakes!
Posted on: 28 April 2020
Being self-employed comes with plenty of luxuries, including the ability to set your own schedule and more-or-less be your own boss. However, when you're self-employed, you also face the burden of figuring out your own taxes. Unlike with a traditional employer, who deducts taxes from each paycheck and even keeps track of your income/taxes throughout the year, being self-employed means taking responsibility for this task.
If you're relatively new to the world of being self-employed, there are some common tax mistakes that you'll want to be careful to avoid.
Not Paying Your Self-Employment Tax
One of the biggest financial drawbacks to being self-employed is the requirement of paying self-employment taxes, which includes contributions to Medicare and Social Security. This tax typically accounts for about 15.3% of your income, though there are exceptions and exemptions. A lot of newly self-employed workers aren't familiar with this requirement because when they worked W-2 jobs in the past, their employers automatically deducted their portion of this tax and paid half of it for them.
Failing to pay your self-employment tax when it is due or even underpaying your self-employment tax can result in fines, penalties, and interest--so make sure you're setting aside money to cover these taxes with each payment you receive.
Missing Out on Tax Deductions
One advantage of being self-employed is the ability to deduct a lot of your work-related expenses from your taxable income, which can reduce your total tax burden as well. The specific deductions that apply to you will vary depending on the type of work you do. However, one of the biggest deductions you'll want to look into if you do some or all of your work from home is the home-office deduction.
This allows you to calculate the portion of your total mortgage or rent payment that makes up your home office and deduct it from your taxable income. One of the most important caveats of this deduction, however, is that you'll only qualify if you use the space 100% for your work or business.
Making Late Quarterly Tax Payments
As a self-employed worker, you may also be required to make quarterly estimated tax payments each year. These are typically due in April, June, September, and January; being late on these payments or skipping them altogether can result in penalties when it comes time to file, even if you pay your tax burden in-full at that time.
There's a lot to remember about taxes when you're self-employed, but a tax planning professional can help you make sense of it all. From there, you can file your taxes with a little more confidence!
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