How do tax payments work?
Since an employer is no longer withholding your federal, state, and local taxes for you, you will have to figure out what income tax you will owe based on your earnings and self-employment taxes. Then you will have to make quarterly estimated tax payments. If you don’t prepay enough in taxes either through withholding or estimated payments, you may be subject to a penalty. Keep in mind, though, that if you are earning self-employment income while still maintaining another job, you will get credit for the income tax your employer withholds from your pay, and the Social Security and Medicare wages you earn may lower the self-employment taxes you must pay.
What deductions can I take?
There are many business-related deductions available to the self-employed. Whether you own or rent, you may be able to take a home office deduction for space in your house that is set aside exclusively for regular business use and that is your principal place of business. Related costs that you may be able to deduct include a percentage of your rent or depreciation on a home you own, property taxes, utilities, home maintenance costs, and home insurance. You may also be eligible to deduct a variety of other expenses related to running your business, including internet and phone use, the costs of equipment or supplies, travel, meals, and entertainment. Talk to your CPA about ensuring you’re taking all the deductions available to you.
How does the ACA affect me?
If you left a job where medical insurance was provided, you should know that, as of Jan. 1, 2014, the Affordable Care Act requires all individuals to have minimum essential health care coverage or they must make an individual shared responsibility payment when they file their tax return. With the implementation of the ACA, self-employed individuals are able to shop for flexible coverage through the government’s Health Insurance Marketplace. Check with your CPA for more information about what the law might mean in your situation.
How do I save for retirement?
Self-employed people do have some appealing retirement savings choices that can help minimize their tax outlays and set them up for a secure future. For example, you can contribute up to 25 percent of your net earnings from self-employment—up to $53,000 in 2015—to a simplified employee pension. Alternatively, you can set aside up to $12,500 of self-employment net earnings in a savings incentive match plan for employees (SIMPLE IRA Plan), plus an additional $3,000 if you’re 50 or older. Be sure to ask your CPA about all your retirement plan options.
(To find a CPA visit www.ineedacpa.org.)
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