Owning your own business or working as an independent contractor has its perks. You can set your own rate, and work when and where you want. This is what has drawn so many individuals to the Sharing Economy. Whether it’s Airbnb, Upwork, or Turo – the platforms are flexible, and … if done right, can also be quite lucrative.
When it comes to your income, you want to keep more of it right? Taxes are one thing that can really eat at your profit, which is why it is important to be smart about taxes. Our self employment tax calculator tool can help you plan for estimated taxes. However, you should be aware of a few things before you start using it.
Am I Self-Employed?
If you operate your own business or work as an independent contractor, the IRS classifies you as self-employed. Self-employed workers earn their income directly so there is no employer to withheld taxes. You could be a freelance graphic designer who invoices and collects payment directly from clients or an independent contractor who participates in the Sharing Economy. Self-employed individuals comprise a large portion of the Sharing Economy.
Self Employed Taxes
Self-employed taxes are complicated. There is a lot more to think about, especially since an employer is not withholding any taxes from your pay. W2 wage earners don’t think about employer withholdings because the process is automatic. However, these tax withholdings include income tax, state taxes, social security, medicare, and short-term disability depending.
Taxes aren’t withheld from your paychecks, but you still have to pay them. The IRS doesn’t want to wait until the end of the year to collect, so you may be liable for estimated taxes. Most self-employed workers must pay estimated taxes every quarter. You can learn more about how to calculate and pay estimated taxes here.
How to Calculate Self-Employment Taxes
In addition to estimated taxes, you may also be liable for self-employed taxes. Self-employed taxes represent both your portion and the employer portion of social security and medicare taxes. For W2 wage earners, they pay into social security and medicare, then their employer also pays a portion on behalf of the employee. When you are self-employed, you’re liable for both portions. The self-employment tax rate is 15.3%.
If you are working and earning an income you have to pay into social security. Social security provides income seniors and disabled individuals. Workers and employers both have to pay into social security, so self-employed workers need to pay both portions. Social security taxes total roughly 12.9% of your net income.
In addition to social security, you must also pay Medicare taxes. This covers government-sponsored health insurance for seniors and disabled citizens. You have to pay both the employee and employer portions of Medicare tax, so 2.9% of your total annual income goes towards Medicare.
Can I deduct self-employed taxes from income taxes?
On a positive note, the employer portion of self-employment taxes is deductible. Deducting the employer portion helps reduce your tax liability. Every little deduction helps, so make sure you take advantage of this write-off.
Free Self Employment Tax Calculator
We have a free and easy-to-use self-employment calculator. However, this tool is for informational purposes only. This tool calculates your self-employed taxes, but you should use it in conjunction with a professional tax advisor.
Click here to go to the Shared Economy Tax Self-Employment Tax Calculator.
Other Helpful Tax Resources
Having a good accounting system to track expenses and income throughout the year is important. This can make calculating your self-employed taxes a lot easier and also help you decide which deductions you can take. We like to recommend Quickbooks Pro or Xero, as both are highly reliable and capable programs. Both can help with expense tracking, account reconciliation, cash flows, balance sheet, p&l, invoicing, payroll,1099s, asset management, and more. Keeping track of your finances throughout the year helps you stay organized, which in turn will make preparing your taxes easier and can help save you money in the long run. In addition, maintaining a healthy budget is also crucial to your financial success because you are aware of how your money is flowing through your business. Check out this annual budget tracker.
Get Professional Tax Help
These tax tools are helpful, but they’re no substitute for a professional tax advisor. These certified pros can help save you money in ways you might not even be aware of. To learn more, schedule a free one-on-one strategy session with one of the tax experts at Shared Economy Tax today. For more free tax tips, signup for our complimentary newsletter using the signup form below.