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How to Handle Taxes When You’re Self Employed

by | Feb 1, 2024 | 2024, Accounting, Gig Workers, Small Business, Tax planning, Taxes | 2 comments

How to treat the home office deduction

Many people who work for themselves do so from home. If that describes you, you are probably familiar with the home office deduction.

If you have a home office that you utilize on a regular basis and only for business purposes, you should take advantage of the deduction. You only need to make sure you’re calculating it accurately and following IRS standards.

The key to obtaining any deduction is to obey the regulations. The IRS details them all in Publication 587, but one thing is certain: your office space is your primary place of business and is utilized regularly and solely for business purposes. This implies it does not double as a guest room or anything else. However, it does not have to be a distinct space; a corner of your bedroom with a desk, computer, and files might qualify for the home office deduction if it is used only for business purposes.

The Specifics of Self Employment Taxes

There is no doubt that being self-employed makes taxes more difficult than working for a typical business.

As a self-employed taxpayer, you must pay the self-employment tax (SE tax), which covers your tax obligations under the Federal Insurance Contributions Act. FICA funds Social Security and Medicare.

When you work for a regular employer, your employer pays half of the FICA tax for you, and you pay the other half. However, when you are self-employed, you are responsible for everything since you are both the employer and the employee. Don’t worry, you may deduct 50% of your self-employment taxes.

The self-employment tax is 15.3% of your self-employment income and is distinct from the federal income tax. To handle the increased expense, plan your cash flow for the full year and recognize that you are paying 15.3% more than standard income tax.

Quarterly Taxes: How do they Work?

If your annual tax burden is $1,000 or more, you will normally be required to pay quarterly estimated taxes. Because the IRS wants you to pay taxes when you earn them, you’ll most likely have to make anticipated tax payments four times a year: in April, June, September, and January. The first payment for the current year is due on the same day as the current year’s tax return, Tax Day. Even if you file an extension, you must pay the same day.

To prevent feeling tight for cash when each payment rolls around—and to avoid the harsh underpayment penalties if you don’t pay enough throughout the year—It is critical to plan ahead of time for all of your tax obligations and set aside the necessary funds.

The ideal method to schedule your quarterly payments is to use the estimated tax safe harbor rule, which states that you should pay either 90% of the tax reported on the current year’s return or 100% of what you owed the prior tax year.

PSACPA can help you quickly assess how much you owe and set up quarterly anticipated tax payments to ensure you’re covered throughout the year.

2 Comments

  1. You don’t understand how much this helped. I was so stressed.

  2. Thanks, didn’t know some of this.

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2 responses to “How to Handle Taxes When You’re Self Employed”

  1. Stacy

    You don’t understand how much this helped. I was so stressed.

  2. ComoVaw

    Thanks, didn’t know some of this.