How to Save Yourself from Self-Employment Taxes
They say the only two things guaranteed in life are death and taxes, but at least death has the decency to only happen once– taxes, on the other hand, show up year after year. With tax season upon us, you’re probably taking a serious look at your taxes. But if you’re new to self-employment tax, you may not know where to start.
That’s where we come in. In this post, we’ll introduce you to the self-employment tax and what to expect during your first year of filing. We’ll also share some helpful tips for saving money for your private practice along the way.
But first, our mandatory disclaimer: The following information is for educational purposes only and not a substitute for professional tax advice. Always consult with an attorney, CPA, or certified tax professional before taking action on anything you read below.
Now, let’s get started.
What is the Self-Employment Tax?
Self-employment tax is a tax required of individuals who work for themselves. The tax consists of Social Security and Medicare assessments. If you’ve ever been employed by a business, you’re already familiar with the idea of paying into Social Security and Medicare somewhat involuntarily through your employer. Your employer sends taxes to the IRS and reports wages to Social Security.
When you’re self-employed, you’re still obligated to pay taxes. The only difference is that the responsibility rests on your shoulders to pay taxes to the IRS directly.
Who Needs to Pay Self-Employment Tax?
Any self-employed person who has received net earnings of $400 or more in the previous year is required to pay self-employment tax.
So, just who is defined as a self-employed person?
Based on the definition given by the Internal Revenue Service (IRS), you are a self-employed person if you meet any of the following criteria:
- You run a business as a sole proprietor or an independent contractor.
- You are a member of a partnership that operates a trade or business.
- You are in another business for yourself that’s not mentioned above.
So, which one are you?
If you operate a private practice, it’s highly likely that you’re an independent contractor. According to the IRS, those who offer services to the general public are most likely independent contractors. This includes doctors, dentists, veterinarians, and many private practices.
When Should You Pay Your Taxes?
April 15th is permanently ingrained in our minds as “Tax Day”, but in certain circumstances, you’re actually obligated to pay quarterly. If you don’t pay quarterly on the exact IRS schedule, you will become subject to penalties and interest (and let me tell you, Uncle Sam does not forgive our debts).
Here’s how to figure out if you should pay estimated taxes quarterly:
Do you expect to owe $1,000 or more in taxes when you file your return?
If the answer is yes, it’s time to start paying taxes throughout the year.
The IRS has designated four payment periods and due dates for paying quarterly self-employment taxes. The due dates are as follows:
April 15th, June 15th, September 15th, and January 15th.
When to Pay Your Estimated Quarterly Taxes
You have 15 days after the end of each payment period to send in your estimated taxes. Be sure that your envelope is postmarked on or before the due date, or you may be charged a penalty. If any of the due dates fall on a Saturday, Sunday, or a legal holiday, it’s okay to pay on the next business day.
So, you may be thinking, how do I know how much to pay the IRS?
To figure out your estimated taxes, you’ll need the following:
- The Estimated Tax Worksheet
- The IRS Tax Rate Schedules
- Your previous year’s tax return
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You’ll use all three of these items to estimate how much you should pay in this year’s tax obligations. Your best option is to match your previous year’s taxes 100%. This will help you avoid an underpayment penalty.
It may also be necessary to pay more than 100% of your previous year’s taxes.
Here’s an example for this year: If your 2015 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you have two options. You’ll either need to pay 90% of your expected tax for 2016 (if you expect to earn less this year than you did in 2015) or 110% of the tax shown on your 2015 return.
This is why we highly recommend seeking a certified tax professional to help you sort through your tax obligations, but it’s still a good idea to understand these rules for yourself.
Now, onto the good stuff:
How to Deduct from the Taxes You Owe
It’s never fun to pay taxes, but the good news is you can deduct quite a bit. I don’t have to remind you to be ethical and not go overboard with deductions. Keep in mind that the self-employed are among the most frequently audited, so make sure you keep those receipts.
Here are the top tax deductions for those in private practice:
Business Equipment – The equipment you use to run your private practice, including your computers, fax machines, copiers, and other technology.
Office Supplies – Paper, pens, staples, etc– most any consumable product can also be deducted.
Lease – Deduct the amount you pay to lease your office space.
Utilities – Same goes for utilities.
Software – The software you buy to run your private practice is deductible. That includes TheraNest!
Insurance Premiums – You may deduct your personal health insurance premiums along with certain medical expenses, such as doctor’s visits and medications. This extends to your family (spouse and children).
Malpractice Insurance – Do you need to pay malpractice insurance? Fortunately, you can deduct that expense from your taxes due.
Professional Certifications – Do you need to pay dues to continue membership in an job-related organization? Deduct that amount from your taxes.
Continuing Education – Keep up to date by attending workshops and conferences, and then deduct the associated expense. You can deduct travel expenses in some cases, also.
If you haven’t already, now is a great time to consult with a certified tax professional. Be sure to take a proactive stance with your taxes before the IRS comes a knocking. Good luck!