When you begin a work at home business, you have to take self-employment tax into consideration. You will no longer have an employer to take taxes out for you, so the responsibility will fall to you.
The best way to make sure you are paying the proper tax is to begin estimating your tax payments. Consult your CPA or tax preparer for information on how much to take out of your income and set aside for quarterly taxes. Instead of paying one lump sum when tax time comes, you can pay your estimated tax quarterly – this will save you the hassle of saving money throughout the year and will help ensure you stay on track.
Keep track of all your deductible expenses. That will include business expenses, such as office supplies and some necessary travel. It will also include health insurance premiums. Depending on your situation, other items might be tax deductions as well, such as a portion of your mortgage or your tools of the trade.
At first it might seem like you are paying a great deal of money into your self-employment tax. The reason for this is two-fold: when you are employed by someone else, you pay half of the tax bill and your employer pays the other half. When it’s just you, however, you are considered both employee and employer. So you might pay more in the beginning, but you will probably get money back at the end of the tax year.
There is a certain threshold of earnings that you must meet in order to be required to pay the self-employment tax. You might not make that threshold in the first few years of running your business, but if all goes well, you will eventually work up to that amount. Check with your CPA now to avoid a big surprise later!
Speaking of CPAs, now is a good time to get one on your side. Whether you choose an attorney to handle your taxes, opt for a Certified Public Accountant or decide to handle it all on your own, you will need some guidance starting out. A professional can find problems with your returns, advise you on how to save on taxes and offer you lots of advice on what to do in the coming years as your tax requirements change.
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