Are you saving enough for taxes?
By Darlene Aderoju, America Saves
If you work as a contractor or freelancer, you’re a part of the gig economy, and you may be required to pay the IRS the self-employment tax.
Are you saving enough for taxes? Here are five things you should know about taxes and the gig economy:
1. You could be considered self-employed even if you don’t own a business
If you’re a business owner, then you are self-employed. But did you know that freelance and contract work is also considered self-employment? Even though you’re providing a service to someone else or a company, when you work as a freelancer or independent contractor you’re considered a self-employed worker by the Internal Revenue Service. This means during tax time, you’re held accountable for paying the taxes that your employee would usually pay on your behalf. >> Learn more about being self-employed
2. You might have a unique set of tax obligations
As a self-employed worker, you may be required to file an annual tax return and pay estimated tax quarterly. You may also be required to pay the self-employment (SE) tax. The SE tax pays for Social Security and Medicare. When you work for a traditional employer, your Social Security and Medicare taxes are automatically withheld from your paycheck. When you’re self-employed those taxes are not taken out of your initial pay, so you’re responsible to pay the IRS later.
3. You can calculate your self-employment taxes with IRS Schedule SE (Form-1040)
IRS Schedule SE (Form-1040) allows you to calculate the taxes owed on your net self-employment pay. When you complete the form, the Social Security Administration will use the information to determine your benefits through the social security program.
Once you determine the amount you owe the IRS in taxes, you can make quarterly payments called Estimated Tax, to avoid a large bill at the end of the year. Estimated Tax payments for the remainder of 2018 are due on June 15, September 15 and January 15, 2019. >> Access IRS Schedule SE (Form-1040)
4. You should save about 30 percent of your income for taxes
If you decide not to make estimated tax payments, it’s best to save about 25 to 30 percent of your self-employment income each time you get paid. This is to ensure that you if you get with a large tax bill at the end of the year, you’ll have enough money set aside to pay it off right away. Saving 25 to 30 percent of your taxes may seem overwhelming, but you’re lucky and you don’t owe taxes at the end of the year, you’ll have a stash of savings that you can put towards your savings goal.
5. You can take a 10-minute test to see if you’re subject to the self-employment tax
You can take a test provided by the IRS to see if your income is subject to self-employment tax. The information you’ll need is the type of self-employment income you’ve received and your net profit or loss from your self-employment income. The test has an estimated completion time of 10 minutes. >> Take the IRS self-employment test.