Self-Employment Taxes 101 (or, “Hello Schedule C!”)
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Most working-age people go through their lives without ever seeing the Schedule C “Income from Self-Employment” tax form. So congratulations! You’re part of an exclusive club that’s set out to make their own path when it comes to making money. Whether you’re an online seller full-time or supplementing your income, it’s a bold choice.
However, if you’re used to dealing with W-2 forms come tax time, switching gears can be a challenge. In fact, it can be outright terrifying when you see how much work is involved paying taxes as a solo professional. Here are some things you need to look out for before you get started.
Tax Time Just Got Crazier
Remember doing taxes as a salary or wage employee? You get a W-2 (or three) in the mail, maybe a few forms having to do with interest or investments, enter that info into a program online or take it to a tax preparer and you’re all set. It was a little painful, but usually not terribly bad.
You won’t believe it, but you’re going to be reminiscing about those days here soon. Becoming self-employed means you’ll be dealing with new tax forms – the aforementioned Schedule C and also the Schedule SE, to calculate your self-employment taxes. (Yep, you owe those now, too.)
It also means that you need to keep track of our income and expenses. Nobody is going to do it for you! If you made some money here and there on Etsy, another bit through eBay and another chunk through craft fairs, you must declare all that income with the IRS and your state’s taxing authority, but nobody will hand you a W-2 at the end of the year letting you know your income totals.
One of the good things about self-employment is that you get to deduct any business expenses – cost to make your goods, advertising, mileage, home office, storage, Etsy fees, etc. – from your taxes. But it’s up to you to keep track of all of your deductions and hang on to any receipts proving that they are really business expenses.
It’s All You Now
How so? When you were a wage or salary worker, your employer took out taxes for you. You likely remember when you had to inform your boss how many dependents you had so they knew how much to take out of your check each period. Although you didn’t like having less money on your paycheck it was nice not having to do your own paperwork.
Or at least that’s what you’ll think now that you’re tracking your own numbers instead of receiving W-2s! Seriously, your entire financial life is dependent on you now. Since you don’t have taxes taken out of your paycheck anymore, it’s up to you to pay what you owe to the government.
This involves sending in quarterly estimated tax payments in every few months, starting with April. It seems a little unfair to make you pull double duty filing for both quarterly taxes and April “big time” taxes, but it actually can help you get your business and paperwork organized.
It Can Be More Expensive
Back when you were on salary or wage you probably felt like you were paying through the nose. Unfortunately it may feel like that even more now that you see just how much your employer was helping you!
Stuff like FICA and Medicare are much more complicated than ever before because not only was your employer sending the payment in for you but they were actually paying half of what you owed. Plus, sending in quarterly estimated taxes every few months can really get you down if you don’t figure out a schedule fairly quickly.
Keep this in mind, though: millions of people pull it off every year and you can too. If you stay organized, keep a clear head, and ask for help when you need it, you’ll be just fine upon your switch over to self-employment.
Overwhelmed? This short read from Outright will get you oriented in your new tax-filled world. Download the Online Sellers Guide to Taxes.
And if you have more questions, Outright will be hosting two tax Q&A sessions on Thursday, 3/7/13 at 10am PT/1pm ET and 1pm PT/4pm ET. Sign up here!