Self-employed people have many advantages in work and in life. Unfortunately, one of these advantages is not taxes. As a matter of fact, taxes are probably the only disadvantage of working for yourself. The tax situation for self-employed Americans is quite different from that of employees. I am not a tax expert and do not even do my own taxes, but I have been self employed all my life, so I do understand enough to give you some very basic info about taxes for self-employed people.
Very Basic Info about Taxes for Self-Employed People
As you probably know, when you’re an employee, your employer deducts taxes from your paycheck each pay period and sends you a W-2 form at the end of the year. On April 15, when taxes are due, you usually either owe a little additional money to the government or you receive a small refund. This is a pretty painless way to pay taxes.
As a self-employed scopist, however, you are your own employer. When you are paid by your court reporter clients, you will be paid 100% of what you billed them. This sounds like a good thing. And it is. But now there is no one to deduct taxes from your income.
When you work for yourself, at the end of each year rather than sending you a W-2, your clients will send you a 1099 form which will show that no taxes were deducted from your checks. Because you are self-employed, your clients by law are not allowed to deduct taxes. But you still have to pay taxes.
So How Do You Pay Tax if You’re Self Employed?
People who are self employed pay approximately the same dollar amount of taxes that they would pay if they were employees. The primary difference is that self-employed people pay this money directly to the government rather than their employer deducting the money from their pay.
This money is paid in the form of what is called estimated taxes. Estimated taxes are estimates of what people will owe in taxes for the current year based on what they earned the previous year. Estimated payments dates for federal taxes each year are April 15, June 15, September 15 and January 15.
Many individual states also require self-employed people to pay estimated taxes. You may be fortunate enough to live in a state that does not require this. If you do have to pay state tax, though, this will be far less money than you will pay for federal tax.
Everyone’s tax situation is unique to them. How much tax you have to pay depends on how much you earn, the number of exemptions you have, how many deductions you have, as well as various additional factors.
Who Do I Listen To?
For information about state taxes for the self employed, refer only to the tax department for your state. At the end of this article I have included links to all of the tax departments for all 50 states as well as the District of Columbia so you can easily discover whether you owe state tax at all and, if you do, find out information about this tax for your specific location.
When researching rules about federal taxes for the self employed, refer only to the Internal Revenue Service website. Here’s a little of what the IRS has to say on the topic. Although not terribly fun to read, it is straight from the source:
“If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax. Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Individuals, including sole proprietors, partners, and S corporation shareholders, generally use form 1040-ES to figure estimated tax.” – Internal Revenue Service website
Also, as you may have heard, there is a new federal tax law in America. It didn’t go into effect until January 1, 2018, so it doesn’t affect your 2017 taxes. Don’t worry about it now.
Estimated Tax Temptation
For a self-employed scopist – and in fact, any self-employed person – it can be a huge temptation to spend all the money you earn and set aside nothing for your estimated taxes each quarter. If you get behind in paying your estimated taxes one quarter, you must try to play catch-up before the end of the next quarter. If you aren’t able to catch up then, you’ll have to try to catch up the following quarter. And if you don’t pay all of your estimated taxes due by the April 15 tax filing deadline, you probably will have to go on a payment plan with the IRS until you’ve caught up. Now you will find yourself paying even more than if you’d made your quarterly estimated tax payments on time, because the IRS payment plan includes interest.
Not paying estimated taxes on time can be a very slippery and stressful slope. Don’t fall into this trap. Pay your estimated taxes in full every quarter of every year.
As a self-employed person, you should transfer approximately 25% of your gross income (the total income you receive) into a separate bank account each month, so that you will be sure not to spend it. This will help you easily, and without any stress, to make your quarterly estimated tax payments every year.
Almost no self-employed person keeps a separate bank account for their estimated taxes. It is very rare. Be the person who actually does this.
Taxes are so important and full of so many rules. The most important tax rule of all: Don’t be discouraged from becoming self employed just because you have to pay taxes yourself. No one should be discouraged from doing anything because of taxes.
State Tax Department Websites for All 50 States and the District of Columbia