Believe it or not, the barrier to being considered a Self-Employed Individual by the IRS is a rather low one. In fact, it’s entirely possible for you to fall into this category without being aware of it. According to the IRS Guidelines, an individual is considered self-employed if they:
Carry on a trade or business as a sole proprietor or independent contractor.
Are a member of partnership that carries on a trade or business.
Or are otherwise in business for yourself (including a part-time business).
In other words, if you offer goods or services to others for compensation then you are considered self-employed by the IRS. Note that the services or goods aren’t exactly specified, meaning they can encompass a rather large spectrum. So, whether you’re doing something as simple as selling things online through Amazon or eBay, dipping your toe into self-published writing, acting as a Youtube content creator, or spending a few hours a day as an Uber or Lyft driver to get a little pocket cash, you are officially considered self-employed. Congratulations.
But because you’re now considered self-employed, the IRS will expect estimated tax payments every quarter to cover what is called Self-Employment Tax, or you’ll suffer a pretty substantial late-fee penalty. A staggering number of clients who came to have their taxes done while I was working as a Tax Preparer learned this the hard way, but fortunately you can avoid this costly mistake early on with a little planning.
If you set aside an account specifically to hold the portion of the Self-Employment Tax that you need to pay quarterly, you can pretty much mitigate the risk of late fees entirely. The general rule of thumb is that you’ll owe roughly 15.3% of your net earnings to the IRS (12.4% for Social Security Tax and 2.9% for Medicare). By placing the taxable portion of your earnings into this account over the course of a payment period, you’ll have roughly the exact amount that you need to send off by the due dates the IRS has established:
Payment Period: Jan.1 – Mar.31 | Due Date: Apr.15
Payment Period: Apr.1 – May.31 | Due Date: Jun.15
Payment Period: Jun.1 – Aug.31 | Due Date: Sep.15
Payment Period: Sep.1 – Dec.31 | Due Date: Jan.15 (of next year)
Now, there are some other factors to consider, such as the wage base for Social Security or if you fall into the category of a High-Income Earner. But with this method you’ll pay off most, if not all, of your Self-Employment Tax as early as the first year and have a more accurate read of just how much profit you’ve made without being caught off-guard when Uncle Sam comes knocking.
Or you can hire a bookkeeping firm to do it all for you instead if you don’t have the time. In that case, just Contact Us. That’s what we at From Red To Black LLC are here for—doing what we can to help leave your books in the black.
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