There is an old saying that goes “There are only two things that are certain in life, and those are death and taxes.” I wonder if there is actually such a thing as death by taxes. Last night, I was working on my tax return and nearly had a heart attack. It seems as though I have misunderstood a very important principle regarding income taxes and self employment tax. They are not the same thing, you know.
While I do know a lot about owning and operating a home – based business, I will be the first to admit that I do not know everything. This rather taxing situation is a prime example. I mistakenly thought that self employment tax was income tax on the earnings of self employed people like myself. I was wrong. Self employed individuals must pay both an income tax on their earnings just like everyone else and a self employment tax which is the functional equivalent of the Social Security and Medicare taxes that are withheld by employers for people that are not self employed.
Since no one is withholding self employment tax for you, you must do it yourself. You can pretty much guess what happened last year given the nature of my misunderstanding about self employment tax. The way that you take care of withholding your self employment tax is by paying estimated tax on a quarterly basis. The IRS has plenty of information available on its web site to help self employed individuals calculate their estimated tax payments as well as information on when and where to send them. You can even make your estimated tax payments to the IRS electronically using a secure system.
Calculating estimated tax is not hard. Taking that money out of your earnings and setting it aside to make those payments will require discipline, but you can do it. Sending in those quarterly payments simply requires marking some dates on your calendar and getting the money to the IRS. Sounds easy, I know. It is easy – if you realize that it is in fact part of being self employed and it must be done. Please do not make the mistake of confusing self employment tax and income tax. You must pay both, and it is much easier to do that over the course of the year as you earn the money rather than be surprised by it when you go to file your taxes.
Photo by cohdra on morguefile.com.