When you work for an employer, most of your taxes will be covered by payroll withholdings or your employer. But if you’re self-employed, additional responsibilities required by the IRS can make calculating your liability more complex. To help you avoid unpleasant surprises this year, here are five common questions about tax planning as a self-employed individual.
What to Know About Tax Planning & Self-Employment
Do I have to pay Medicare and Social Security?
Employers are required to cover a portion of FICA—or Medicare and Social Security—taxes and withhold the rest. When you’re self-employed, the responsibility is yours. This “self-employment tax” is in addition to your federal income tax. Typically, this responsibility will equate to 15.3% of your income: 12.4% for Social Security and 2.9% for Medicare.
What are some ways to reduce the self-employment tax?
Some of the easiest strategies to minimize this responsibility are to thoroughly deduct applicable business expenses and health insurance costs. You can also subtract half of your self-employment tax from your income, which in turn, can lower your federal income tax requirements.
With help from a certified public accountant, you can also explore other potential solutions to reduce this liability—such as by choosing a more advantageous business structure or deferring income.
When do you need an Employer Identification Number?
If you’re a sole proprietor with no employees, an Employer Identification Number (EIN) isn’t necessary. Instead, all you’ll need to file is your Social Security number. If you have employees, however, you’ll need an EIN to process their taxes.
Should I make estimated quarterly payments?
In most cases, self-employed individuals are required to make estimated quarterly payments to the IRS. Estimated payments can also help you avoid hefty bills when filing your annual return.
Through this practice, you pay an estimate of what you’d owe to the IRS for the most recent quarter. If you overpay, you can deduct it from the next estimated payment. If you underpay, you can make it up in the following quarter.
When you’re self-employed, taking out time for tax planning may not always fit your busy schedule. Fortunately, Bergamo Tax & Financial Services in Watertown, CT, offers comprehensive support to streamline the process. Well-versed in current laws and strategies, this CPA firm will employ solutions to make sure you’re not paying more than necessary. To learn more about how these certified public accountants can simplify your finances, visit the firm online. If you live in New Haven, Hartford, or Litchfield County, and would like to schedule a consultation with a CPA, call (860) 274-1655.