As a self-employed entrepreneur managing the affairs of a struggling company, the task of filing and paying taxes each year can feel overwhelming, especially when your company is already having cash flow problems. Without adequate preparation you could be caught in a predicament in which you may have to neglect debt repayments in order to fulfill unexpected tax requirements.
Therefore, the key to simplifying the process of paying your self-employment taxes on time and in full, despite the presence of burdensome debt obligations, is to accurately anticipate what you’ll have to pay, while also finding as many breaks as possible by gaining an understanding of all applicable rates, deductions, and tax reduction strategies.
In the US, independent contractors pay a self-employment tax to cover Medicare taxes and Social Security taxes. Normally these costs would be split in half amongst the employer and the employee, but since a self-employed person acts as both the employer and the employee they are required to cover the full tax, which in 2013 is set at 15.3 percent of net income. Of this percentage, 12.4 percent is paid towards the Social Security tax, but this tax can only be applied to the first $113,700 of net income. The Medicare tax accounts for the other 2.9 percent of the tax.
How do you calculate how much you owe in self-employment taxes?
First, you’ll need to determine your net income, which can be calculated by subtracting your total business deductions and expenses from the amount of income you earned this year. Once you’ve determined your net income, multiply that figure by 92.35 percent to arrive at your net earnings. If you have net earnings that exceed $76,200 then the first $76,200 would incur the 15.3 percent tax while any amount above that would incur a 2.9 percent tax. If your estimated annual tax liability exceeds $1,000 then you’ll have to pay your self-employment taxes on a quarterly basis using form 1040-ES.
How can you decrease the amount of taxes you owe?
The only way to reduce the amount you owe in self-employment taxes is to increase your total business expenses throughout the year. These expenses could then be filed as deductions. Although this strategy would require you to spend more money on the business, these funds would otherwise be devoted to taxes anyway, so allocating them towards operational investments instead may prove to be beneficial. Keep in mind that you’ll want to file deductions on depreciable items such as electronics, furniture, and vehicles the same year they’re purchased in order to receive the highest possible deduction. To save the most on taxes this year be sure to research tax deduction ideas for the self-employed.
Can you extend your tax payment deadline?
As a self-employed individual juggling debts you may have trouble coming up with tax payments in time. If you foresee such a problem the best course of action would be to file for an extension. If you’re doing business as an independent contractor (filing 1099), sole proprietor (filing Schedule C), or a single member limited liability company, then you could request a deadline extension by filing Form 4868 with the IRS. If you’re doing business as another type of entity, such as an S-Corporation, then you may have to file for a corporate tax extension using Form 7004.
Compounding debt can create a host of problems for your growing business, including difficulty obtaining financing due to credit damage and lack of cash flow. Fortunately, if you’re proactive about staying on top of your tax filing duties and requirements you won’t have to let debt put you in bad standing with the IRS.