‘Not all the money belongs to you’: Self-employed? Avoid these mistakes when filing your 2021 taxes

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More Americans are becoming their own bosses as the “great resignation” continues.

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Now he has to resign himself to the fact that his tax situation is likely to get more complicated.

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Freelancers, independent contractors and the self-employed can claim some tax write-offs, but they also require more documentation.

And they need to focus more on more dates, not just the beginning and end of income tax filing season.

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Case in point: The Internal Revenue Service will begin accepting and processing 24 income tax returns for people who are employees with W-2s on Jan. But for the self-employed, a crucial date comes soon: January 18 submission deadline. estimated tax payment For the fourth quarter of 2021.

If a person pays too little, they risk getting a refund that is smaller than the planned or unexpected tax bill—a possibility that no one wants.

When it comes to becoming self-employed, awareness of estimated tax payment obligations is “the most important thing,” said Keith Hall, president and CEO of the National Association for the Self-Employed, an organization that allows its sole proprietors. Connects and small business owner members with legal and tax expertise.

Hall said the professional union added 3,500 people to its ranks of about 20,000 members last year, the largest one-year addition in at least 10 years. Hall’s concern is that many new self-employed people across the country will be waiting deeper into tax season this year to understand what the IRS expects of them.

He’s urging them to start collecting documents and prepare for filing a solid return that won’t be bogged down by IRS questions and backlogs.

According to a November estimate from the Pew Research Center, there were 14.9 million self-employed people in the second quarter of 2021. It was a rebound from pre-pandemic and back to pre-pandemic levels, while employment among other workers remained “shy to a full recovery”. The researchers said.

“The most important thing to remember is to stick to your estimated payments,” said Mike Slack, manager of H&R Block’s Tax Institute. “Failing to make estimated payments is probably one of the biggest tax pitfalls facing new businesses.”

Basics of Taxes for Self-Employed People

Everyone pays their taxes in increments throughout the year, and tax season marks the time when the IRS processes the return and pays the bill.

With every paycheck, salaried workers (who receive W-2s from employers) have a deduction in their earnings for income tax withholding and other taxes, including payroll taxes paid into Social Security and Medicare.

If a person is self-employed, they will put back a portion of their money and send in their estimated tax payments to the IRS every quarter. The money goes to obligations like income tax and self-employment tax (which covers those Social Security and Medicare). tax arrears,

Hall said taking responsibility for it could be a mental adjustment for those who were used to employer paychecks. With every payment that comes in from a sale or customer, Hall says, self-employed workers need to make a habit of remembering that “not all the money is yours” and a portion should always be earmarked for taxes.

Hall said it’s important to keep personal and business finances separate in separate bank accounts. Whenever someone deposits work-related payments into their business account, Hall said a good next step is to immediately transfer a portion to the business’s savings account, where it will be ready for the next estimated tax payment.

In addition to the January 18 deadline on fourth quarter payments, Scheduled Upcoming Estimated Tax Payment Deadline for Self Employed People The estimated payments for the first quarter are April 18, June 15 for the second quarter, September 15 for the third quarter and January 15, 2023 for the fourth quarter payments.

How Do Self-Employed Employees Calculate Estimated Tax Payments?

“The general rule is that each quarterly payment should equal 25% of the lesser of 90% of your tax liability on your tax return for that year, or 100% of the taxes shown on your previous year’s return,” Slack said. said. , State-level income taxes may also require presumptive tax payments, he added.

There may be penalties for short payments, the IRS says, but people can avoid payments that fall on 90% of the current tax liability or 100% of the previous year’s return. Another way to avoid the underpayment penalty is if an individual owes less than $1,000 after taking into account all withholdings and credits. the agency said.

A good bet for the newly self-employed is coming up with an annual business plan on anticipated revenue, anticipated expenses and what’s left, Hall said.

Assuming that money is going in and coming out at a consistent pace during the year, the next step is dividing the estimated net income amount by four to calculate estimated tax payments.

But keep in mind that other income flows — like a salary from a spouse on the payroll — can make those estimates difficult, he said. “What matters is that you have a good estimate and stick to it.”

Also remember that the estimated numbers are not ironclad, Hall noted. If business is doing better than expected, the incoming self-employed worker may have to dial in the amount of taxes paid. If things are slow, they can dial it down. “You will know when things are going well and when things are not going well,” he said.

The IRS says there are no four equal installments to pay. “If your income is unevenly received during the year, you may be able to avoid or reduce the penalty by annualizing your income and making uneven payments,” it notes.

If tax rules seem daunting for people starting on their own, Hall said better-informed estimates on quarterly tax payments will come as one becomes more familiar with their business.

In addition, many organizations and agencies have the resources and information to offer, he said. “Make sure you know that as a new business owner, you are not alone.”

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