Potential Tax Planning Challenges
If you’re new to self-employment, what you don’t know can hurt you
There are plenty of benefits when it comes to being self-employed. You get to set your own hours, be your own boss, and maybe even work from home in your PJs. However, with this freedom and independence comes the often-overwhelming responsibility of paying taxes. Unlike employees of a business or company, there’s no W-2s and quite a few potential challenges, such as how to file for multiple businesses, cash management, and tax withholding issues, to name just a few. We’ve outlined a sampling of possible problems below to give you an idea of what to expect when paying your taxes while self-employed.
Watch out for these potential tax pitfalls
Let’s start with the obvious, how do you know you fall under the category of self-employed? If you are an independent contractor, the sole proprietor of a business, or otherwise in business for yourself, even if it’s only part-time, then you count as self-employed when it comes to taxes. Many self-employed individuals often have multiple streams of income, especially if their work is part-time. If those activities are closely related, if you’re a salesperson, for example, and you sell different product lines, those count as closely related activities and you can file them all together on a form called a Schedule C. However, if your multiple businesses are unrelated, like private tutoring and a tech repair service, they must be reported separately, and that means keeping separate records of income and business expenses for each individual business. It sounds difficult, but it’s extremely important, as self-employed people are often much more at-risk for an audit.
Another key thing to keep in mind is that unlike regular employees, who automatically have their taxes deducted from their paychecks for things like Social Security and Medicare, those who are self-employed have to calculate this for themselves prior to tax time. This ties into a major misconception that many people who are new to self-employment might have: that they can wait until the filing deadline of April 15th and pay their estimated taxes in one lump sum. If your taxes add up to more than one thousand dollars – and poor financial planning might mean you don’t even know what you owe – the IRS expects something called Estimated Quarterly Taxes at different intervals over the course of the year. If you miss a payment, it can lead to problems with the IRS, including penalties, interest and tax debt. Poor financial planning can also result in people not having saved enough funds to cover their tax debt, which can present a whole other slew of problems.
Filing taxes as a self-employed individual can feel scary. There are many challenges that can feel insurmountable and many opportunities to make a mistake that can bring the IRS down on you. But you don’t have to do it alone. All of these challenges can be made much manageable with the help of a knowledgeable financial consultant in your corner, guiding you not just through every step of your taxes, including important deductions you might not be aware of, but before them as well, helping with financial planning and ensuring that you have the necessary funds reserved for your taxes. For this kind of support, you can count on SeaCure Advisors. We work with your unique financial situation, so call us today to take the stress of your taxes.