Going into business for yourself carries with it many benefits. These include freedom to set your own hours, choosing the jobs you take and do not take, and not having to answer to a boss or supervisor. And, of course, being in charge of your own income and money can be a positive aspect of being a self-employed worker. However, in order to maximize the benefits of your self-employment, you will need to be sure that you take steps to ensure that your tax planning is properly completed. Otherwise, come tax season, you will find yourself in a less than ideal position financially.
Set Aside Money For Taxes Every Time You Get Paid
First and foremost, you need to always keep in mind that when you are self-employed, you are entirely responsible for paying taxes to the state and federal government. When you work for an employer, the taxes taken out of your income only represent a portion of the taxes owed on that gross income. Your employer actually pays a portion of that tax amount.
When you are working for yourself, you are responsible for the full amount of tax on your income. This can come as a shock to first-time self-employed workers who are not prepared for such a large tax burden.
As such, you need to set aside money for your taxes every time you get paid. Place that money in an account that accrues interest (like a savings account or money market account at a bank) to maximize the benefits of that money. You will likely want to set aside between 25 percent and 30 percent of your gross income every time you receive income just to be on the safe side and ensure that you will not be paying in large amounts of money when taxes are due.
Pay Your Taxes Quarterly
Most individuals think that they only need to do their taxes once a year, during the traditional tax season. However, if you are in business for yourself, it is more beneficial to you to pay your taxes quarterly.
In fact, if you choose to only pay your taxes once a year as a self-employed individual, the IRS will actually charge you a penalty. They prefer to receive money from those not paying taxes automatically in their paychecks, to pay the amount they owe four times a year rather than in one lump sum at the end of the year. This means that they will be sure to get at least some of the taxes due within the calendar year they are due to the government.
Now that you know more about tax planning when you are self-employed, you can be sure to keep track of your finances and avoid paying penalties and back taxes later on. Visit balkam.com for more information.
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