Those deciding to ditch their 9 to 5 conventional job and go the route of self employment do so for many reasons. For many, the freedom to choose the hours, terms and conditions of one’s work is an irresistible draw. Along with the benefits of choosing this path come a host of new obligations, including those pertaining to federal taxation. Self employed tax estimates are something with which the newly independent businessperson must quickly become familiar.
Self employed individuals are required to pay, on their own behalf, the social security and Medicare taxes that in typical employment relationships, would be paid by the employer. Since there is no such relationship in their case, the self employed person must bear the brunt of these taxes on their own. Self employed individuals, for tax purposes, are those carrying on a trade or business as a sole proprietor, independent contractor, or as a member of a partnership doing the same. Anyone so engaged who receives more than $400 in earnings is subject to self employment tax as well as the requirement of quarterly estimated payments. Thus, self employed individuals must learn the process of making self employed tax estimates.
Since income tax is a pay as you go construct, taxes become due throughout the year, as income is earned. Estimated tax is the way in which taxes are paid on income that is not subject to the traditional types of withholding done for wage earners by their employers. Failure to pay enough tax through estimated tax payments can result in penalties being assessed, and further penalties may be forthcoming if sufficient amounts are not received in a timely fashion. Self employed tax estimates must be made and installments paid if a self employed individual expects to owe at least $1,000 in tax liabilities, inclusive of self employment tax. Form 1040-ES Estimated Tax for Individuals can be used to calculate and pay the estimated tax amounts owed.
The liberty that comes from being one’s own boss, and the quality of life that such a decision provides to many cannot be overstated. However, one of the tradeoffs for those benefits is the heightened tax obligations that accompany them. The requirement of making self employed tax estimates is one of those duties. However, with a good understanding of the law, and the various deductions available to self employed individuals, these tax rules should not discourage any aspiring entrepreneur from making the move toward independence.