There are a number of benefits to working for yourself. Being able to control your income, being able to work when you want to and having to answer to no one are big reasons why people opt to work for themselves. But with the sweet comes some of the sour and one of the difficult parts of owning your own business is having to deal with taxes.
What Is 1099?
If you work for yourself you’re considered to be a freelancer, or an independent contractor. When you work for a company, that company is (mostly) responsible for taking the taxes out of your paychecks — you select the amount of withholdings. When you’re self-employed, however, you are responsible for removing your taxes and sending what you owe in to the IRS.
The 1099 is the document you’ll receive from the companies you worked with which will detail exactly how much the company paid you throughout the year. If you make more than $600 from a company, you will receive a 1099.
When Are Taxes Due?
One thing that’s important to note is the date taxes are due. The good news is that taxes are always due at the same time. This can make it easier to plan. In general, most independent contractors pay their taxes on a quarterly schedule. This can make it easier to save your cash for the taxes and can generally make dealing with the IRS much easier.
How Much Taxes Will I Owe?
One thing that many people find difficult is trying to estimate how much tax they’ll owe to the government. There is actually a very easy way to estimate this number. All you have to do is to take the amount of tax you paid on your previous year’s return and split it up into 4 quarterly payments. This is known as the “safe harbor” rule. This rule is the best way to help you to figure out how much you’ll have to pay attention to for your 1099 tax savings.
But what if you started your business late last year and you’ve never had to handle 1099 paperwork before? If you’re newly self-employed the best bet is to take 15.3% of your income and to set it aside just for the self-employment tax. The next thing you’ll have to figure out is what tax bracket you’re in. This can be found by looking at the IRS website. In general, the more you make the higher percentage you’ll have to pay in taxes.
Another good tip is to take the tax money you’ll owe and to put it in a completely separate bank account. By having it in a seperate account you’ll be less likely to spend the money you’ve saved for taxes and more likely to keep that money in the bank where it belongs. Then you can simply pay your quarterly taxes out of that bank account.
One great thing about working for yourself is that you can deduct certain things from your taxes. For example, things like electronics, travel expenses and office expenses can all be deducted from your taxes. A good rule of thumb is that every dollar you spend on your business is a dollar that you’ll be able to subtract from your income.