Being your own boss can be exciting. You have the ability to work from home if you choose, set your own hours, and work with customers and clients that you truly enjoy. While it may not be as fun, paying small business taxes is another critical aspect of running your business successfully.
1. Make your estimated payments
When you worked for someone else, you probably didn't think too much about making tax payments. Your employer withheld a certain amount from each paycheck, and at the end of the year, you filed your tax return. As a self-employed person, you are now required to make your own tax payments. Estimated tax payments are calculated based on your company's profits and are paid quarterly to the IRS as follows:
You'll want to check with your state and local tax authorities in order to confirm the timing of any other payments due.
2. Don't forget self-employment taxes
Working for yourself means that you are now required to pay self-employment taxes. Self-employment taxes are assessed on top of any income taxes that are due on your earnings. For 2019 earnings, the self-employment tax rate is 15.3% on the first $132,900. A 2.9% Medicare tax continues once income exceeds the $132,900 threshold. The self-employment tax represents both the employer and the employee portion of Social Security (6.2% each) and Medicare (1.45% each) of the tax paid.
3. Deduct your health insurance and retirement payments
As a self-employed person, you will be responsible for paying the cost of health insurance and retirement savings out-of-pocket. Fortunately, the IRS allows you to take a deduction for qualified expenses. Health insurance premiums can be deducted directly on your 1040 tax return regardless of whether you itemize your deductions. The amount of health insurance premiums that are deductible is limited to your income earned.
There are a number of different types of retirement plans available to you as a self-employed person. The amount that you can contribute and deduct for tax purposes will depend on the type of plan that you choose. Unlawful tax deductions can trigger a tax audit, so it can be helpful to seek guidance from an accountant or CPA.
4. Consider a home office deduction
If you have a portion of your home dedicated to running your business, you may qualify for a deduction of related expenses. You can qualify whether you own or rent your home.
In order to be eligible for the home office deduction, you must meet the following requirements:
Navigating the tax landscape for your business can be a little scary when you're first starting out. It's important to stay up to date on the latest tax legislation for any changes that might affect your business. If you have any questions about tax laws related to your business, ask a lawyer.