It’s 2016, and more people than ever before are choosing to go down the self-employed route. This is largely to do with the fact that there have never been more options. Plumbers, electricians, freelance designers and driving instructors can all fall into this bracket.
However, it can be a tricky lifestyle to navigate. Self-employed workers must pay the same federal income tax as everyone else, but need to calculate it themselves. This means you have to be organised, hard working and careful about how you track your figures.
- Calculating your income
If you were employed, you wouldn’t have to worry about this. Your employer would hand you a W-2 form at the end of each year that tells you how much you made. But since you’re self-employed, you have to discover this figure yourself.
And it’s utterly imperative that you do. If you are buying your first home, for example, you may need to produce records that show your income. There are many other reasons why it’s important to do so, so don’t slip up.
So, from day one, you should be keeping track of all income sources. An Excel spreadsheet is probably your best bet, and there are a number of templates ready for you to use. You should have a total yearly income as well as week by week, so a quick glance can tell you what you need to know.
You will also need to track expenses in the same manner. This is any bit of money you spend in order to help you out at work. It could be stationary, an internet bill, gas, you name it. At the end of the year, subtract expenses from income to receive your net profit figure.
- Paying taxes
So, you’ve calculated your net profit for the year. The next step is to fill out a tax return. Firstly, check the federal income tax rate to see what bracket you fall into. This gives you a rough idea of how much you’ll be taxed.
When you fill out your tax return, include that net profit figure that you calculated. You’ll also note down your expenses, and as long as they’re accurate, you can see them reimbursed. This is another reason it’s imperative to track everything. If somebody questions your expenses, or income, you can quickly produce receipts that prove otherwise.
Self-employed workers will generally make four estimated tax payments throughout the year. Take into consideration your expected annual income and the tax rate to produce a rough figure.
- Other types of tax
Everyone must also pay Social Security and Medicare taxes. Again, since you’re self-employed you must do these yourself. In 2015, employees paid 7.65% of their income in Medicare and Social Security, and their employers added 7.65%.
Sadly, self-employed workers combine these totals, for a sum of 15.3%. You can however claim a tax relief, a reduction of this number that you’ll do when you file your tax return.
It’s a tricky route to go down, but it’s ultimately rewarding. Self-employed workers have aa lot more freedom than traditional employees, and that extends to income too. Just be sure to track things correctly and you should have no trouble whatsoever.