Being self-employed has a lot of perks—freedom, flexibility, and the satisfaction of being your own boss. But it also comes with one major responsibility: handling your own taxes. Unlike employees who have taxes withheld from their paychecks, self-employed individuals need to plan for taxes on their own. If you’re not careful, you can end up with a hefty bill at the end of the year. Here’s what you need to know to stay ahead of your tax obligations.

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1. You’re Responsible for Self-Employment Tax

Let’s start with the big one—self-employment tax. When you work for someone else, your employer pays half of your Social Security and Medicare taxes. But as someone who’s self-employed, you’re both the employer and the employee, which means you’re responsible for the whole 15.3% self-employment tax. That covers:

• 12.4% for Social Security (on earnings up to a certain limit)
• 2.9% for Medicare (on all net earnings)

Sarah, a freelance photographer, learned this the hard way. Her first year in business, she didn’t set aside enough for self-employment taxes and was hit with a big bill come tax season. She quickly learned to keep 15-20% of her earnings in a separate account just for taxes.

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2. Quarterly Estimated Taxes Are a Must

Unlike traditional employees, self-employed individuals don’t have taxes automatically withheld from their earnings. That means you’ll need to make quarterly estimated tax payments to the IRS. These payments are due four times a year: in April, June, September, and January.

Think of it like paying your taxes in installments throughout the year. If you don’t pay enough in estimated taxes, you could face penalties come tax season. The general rule of thumb? If you expect to owe more than $1,000 in taxes for the year, you’ll need to pay estimated taxes.

Sarah realized this after her first tax season when her accountant told her that paying quarterly would prevent her from having a giant tax bill waiting for her at the end of the year. Now, she sets aside part of her monthly earnings for her quarterly payments.

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3. Keep Track of Deductible Expenses

As a self-employed individual, one of your biggest advantages is the ability to deduct business expenses. This can significantly reduce your taxable income. Here are a few common deductions:

• Home Office Deduction: If you use part of your home exclusively for work, you may be eligible to deduct a portion of your rent or mortgage, utilities, and even internet.
• Supplies and Equipment: Anything you buy to run your business—like a new laptop or software—can be deducted as a business expense.
• Travel and Meals: If you travel for work, those expenses are deductible. Meals during business trips can be deducted at 50%.

Sarah keeps a detailed log of all her business-related purchases and expenses, from her camera gear to client lunches. It’s helped her save a significant amount in taxes every year.

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4. Self-Employed Retirement Plans

One thing many self-employed individuals forget about is saving for retirement. Without a company-sponsored plan like a 401(k), it’s on you to set something up. The good news? There are retirement plans designed specifically for self-employed people:

• SEP IRA: This plan allows you to contribute up to 25% of your net earnings, with a cap for maximum contributions.
• Solo 401(k): Similar to a traditional 401(k), but just for self-employed individuals. You can contribute both as the employee and employer, which allows for a higher contribution limit.

Setting up one of these retirement accounts will not only help secure your financial future but also offer a nice tax deduction for contributions.

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5. Hiring a Tax Professional is Worth It

Taxes can get complicated fast when you’re self-employed. That’s why hiring a tax professional can be a smart investment. A tax expert can help you maximize your deductions, avoid costly mistakes, and ensure you’re staying compliant with IRS rules.

Sarah decided to hire a tax pro after her first year in business, and it made a world of difference. She no longer worries about missing deadlines or deductions—her accountant takes care of all of that for her.

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Conclusion

Tax planning is a crucial part of being self-employed. By understanding your tax responsibilities, keeping track of expenses, and making quarterly payments, you can avoid surprises and reduce your overall tax bill. And if you’re feeling overwhelmed, remember that professional help is always available. Reach out to USATax Solutions for personalized tax guidance that fits your unique needs.