You’ve done it, followed your dream and started your own business, and now reality hits. Income tax time is approaching and it’s time to calculate your taxes.
You need to learn all you can about taxes, just as you learned all you could about your business.
Self employment tax applies to everyone who is self employed and made more than (let’s hope so) $400 a year. It doesn’t matter how old you are, even old enough to collect social security, the federal government wants their part of your income.
When you are employed, your employer shares the tax burden with you, they pay 7.65% of your income and so do you. When you are self employed you get to pay the whole thing, 15.3%. 12.4% goes to pay Social Security and 2.9% for Medicare. But this only applies up to income of $94,200. Above that you only pay the 2.9% for Medicare.
When you are self employed, it is your responsibility to pay quarterly estimated tax payments. If you were employed your employer would do this for you, but since you get to be your own boss, you have to deal with this. Quarterly estimated taxes are due in April, June, Sept. and Jan. If you do not pay them you could be subject to underpayment penalties.
I would recommend that you get the big picture regarding your tax liability. You will need to plan ahead. Take advantage of a free online income tax calculator and estimate your quarterly self employment tax, and calculate your estimated income tax as well. Know ahead what is expected of you. Isn’t your business worth it?