I just became self-employed. How do I pay in and plan for taxes? Self-employed individuals, who often work as sole proprietors, do not issue themselves W-2 forms. Instead, they pay in quarterly to the tax system via estimated tax payments. The tax responsibility for self- employed individuals includes income and FICA (social security/medicare) tax.
What percentage of my income should I expect to pay in taxes as a self-employed individual? Tax is
calculated on net profit, after all business deductions. Ask for help in this area as each taxpayer's situation is different. There is no specific percentage of tax that applies to self-employment income. A lower income family with children and a small business could actually get a tax refund after all the refundable credits are calculated and offset against any SE tax. A high net worth individual could easily be in a 40% marginal tax bracket.
Do I need a Federal ID # ? Not necessarily. Generally it is a good idea to obtain a federal ID #, at no charge from IRS. There are a few tricky questions on the online application -so ask for help if you're not 100% sure of what you are doing. If you will have employees or be subject to federal excise tax, a federal ID # is a must.
Why did I receive a W-9 (request for tax ID #) from one of my customers? Your customer may be required to issue a 1099 to you (your business) for payments made in the calendar year if the total of such payments are $600 or more.
I am thinking of hiring employees. What are the implications of this? Hiring employees involves a substantial commitment to the process of filing payroll tax forms. This can involve certain steps every month, quarter, and at year-end. The amount of work involved is substantial, even if the business just has 1 employee.
What is one of the common mistakes made by small business owners with regard to hiring employees? There are many. Hiring the wrong person can result in financial ruin. Especially if all the steps and procedures aren't followed properly. Come in for a consultation if you are thinking of hiring someone to work in your business. There are no short cuts here - and that is the #1 mistake in this area - thinking that there are.
Why do so many small businesses fail? The #1 reason for lack of success is to overestimate the demand for your product or service. Without income, everything can be set up perfectly, but it won't make any difference. For businesses with good revenue, there are still reasons why they fail. The reasons are different for each situation. Working with professionals (accountants, attorneys, bankers) committed to your success will increase the odds in your favor.
What type of software should I use to track my business? Quickbooks is very affordable and widely used - we recommend it. You can purchase the basic accounting software online or at Sam's Club or Costco. There is nothing wrong with keeping books the old fashioned way if you prefer. A simple notebook and some files will do just fine.
My kids are going to work for me - what do I need to do? Wages paid to children must also be run through payroll. Special rules apply with regard to social security/medicare withholding and also unemployment taxes. Issuing 1099-Misc is not recommended.
Can't I just "1099" my workers (employees) to avoid all this hassle and expense? NO. An employee is generally a worker that you (the employer) have control over. You set work hours, tasks to be completed, and provide training and supervision. All of these factors obligate you to treat your employees according to federal and state law. No shortcuts.
When is worker's compensation insurance required? State law requires that all employers carry worker's compensation insurance coverage. Contact your insurance agent for details, this is one type of insurance you don't want to be caught without.
What type of entity should I create for my business? For single owner entities, an LLC is usually a good
choice. A single member LLC is a "disregarded entity" for tax purposes, streamlining the tax filing process and allowing the owner to file on a Schedule C. Always consult with an attorney regarding the legal ramifications of your entity choice. Use our Entity Selection Worksheet to begin the process. Creating a partnership or S-Corporation involves significant tax filing requirements.
Businesses electing the corporate form of organization may elect to be treated as a "Sub- chapter S" corporation by making the appropriate election on Form 2553. Failing to make this election in a timely fashion can result in serious tax problems (being treated as a C- Corporation).
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We recommend Quickbooks (desktop version) for business recordkeeping. It is very affordable and widely used. The IRS will ask for a copy of your QB file if you get audited.
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