Taxes for the Newly Self-Employed

Before you take your first step into the world of entrepreneurship, there's a checklist of things you'll need to do to avoid tax problems while you're starting.

TAX ID

Depending on how your business is structured and whether or not you have employees, you may need a federal employer identification number. This unique nine-digit number works like a Social Security number for your company.

Businesses with employees need one. Sole proprietorships generally don’t need one, but other corporate structures with more than one owner need one too. It’s free, and you can apply online with the IRS.

ESTIMATES

Most self-employed taxpayers will need to make quarterly estimated tax payments. This might be a new concept for anyone that’s had a W-2 job where tax was withheld from your paycheck.

Being self-employed means that you’re responsible for paying quarterly tax payments. You must pay tax as you earn income, not at the end of the year in a lump payment. Doing that may cause you to incur penalties for failing to pay on time.

Your tax professional can help calculate how much you need to pay each quarter and help ensure that you don’t have a big tax bill next April because you grossly underpayed.

SELF-EMPLOYMENT TAX

If you’ve always been an employee, you might not be aware of the self-employment tax. This is a 15.3% tax most entrepreneurs pay on their company’s earnings. It represents the employer and employee portion of Social Security and Medicare taxes. However, you’ll receive a tax credit of 7.65% for the employer’s share when you file your annual tax return.

There are ways to avoid paying self-employment tax on all of your business profits. One option is to have your company taxed as an S-Corp. But be careful, because S-Corps come with other administrative and legal requirements. It’s best to speak with your tax professional to determine what business structure makes sense for you and your business.