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Tax obligations for self-employed individuals can get very complicated, very quickly. Many consultants, freelancers, and other self-employed workers mistakenly believe their tax obligations won’t change much once they leave their 9 to 5 jobs. What these individuals often fail to understand is their tax obligations will likely increase, and failure to meet these obligations can have serious and costly ramifications.
What are the tax obligations for self-employed individuals? How do these obligations differ from the obligations they had while they were W-2 employees? What are some of the consequences of failing to meet these tax obligations? And how can consultants, freelancers, and other self-employed workers be sure they are avoiding all the potential tax pitfalls?
This article is for those self-employed individuals who are Schedule C tax filers. Regardless of your federal tax designation, though, nothing can replace the guidance of a tax professional with intimate knowledge of your business and personal tax situation.
Think back to the first paycheck you got from your first “real” job. Chances are, you were a bit shocked by how much of your hard-earned money went to pay taxes. Even if no money was withheld for federal or state taxes, a portion of your paycheck was withheld for Social Security and Medicare.
One of the thrills of self-employment is being able to pay yourself without “losing” a chunk of your pay to taxes. If you decide you want to pay yourself $1,000 per week, you transfer $1,000 from your business bank account to your personal bank account and record it as a draw in your bookkeeping software. Taxes are only something you need to worry about in April, right?
Though the mechanics of paying yourself without withholding taxes from the amount of your draw is correct as outlined above, your tax obligations as a self-employed individual are a little more complicated than most self-employed individuals think.
Following are the two obligations that most often take the newly self-employed by surprise:
It goes without saying that failing to meet your tax obligations for self-employed is not a good thing. While most of these failures won’t land you in jail for tax evasion, some of the consequences of not meeting your tax obligations are still pretty severe:
By now, you might be thinking tax obligations for self-employed workers is a veritable minefield. How on earth can you possibly navigate this landscape and avoid all the potential tax pitfalls?
While taxes can be complicated, you can do two simple things to make sure you navigate them successfully:
Tax obligations for self-employed individuals can be complicated. But they don’t have to sink your freelance or consulting business. Understanding your obligations and proactively planning to fulfill them can move your tax obligations as a self-employed individual from complicated to manageable. It just takes a bit of guidance and planning.