The freedom of working from home may be tempting, especially if you work well individually and don’t enjoy the bustle of corporate life. It should be noted that self-employed people are not exempt from federal and state taxes; they must pay their share of taxes just like traditional office employees. However, there is no employer to withhold taxes from each paycheck. Before you decide to begin a work-from-home career, you should learn how to file your own taxes and avoid any penalties.
At tax time, self-employed individuals typically fill out a quarterly payment form from the IRS (Internal Revenue Service). They must estimate their gross income and calculate possible tax payments. These quarterly amounts must be paid punctually to avoid complications or penalties. Essentially, the payments take the place of your tax withholding in a traditional paycheck position. For married people filing jointly, however, an employed spouse can cover the taxes of both individuals. There is no need to send a quarterly payment because the spouse pays the taxes on each paycheck for both taxpayers.
When taxes are withheld from a paycheck, they are designated for several different tax items, from state disability fees to Social Security. If you have your own work-from-home career, you will have to pay the SE, or self-employment, tax. This tax is typically paid at income tax time in April to cover both Medicare and Social Security dues. Even the self-employed need to lean on government benefits when retirement age comes around, so paying into these programs allows you to participate in them later in life.
The SE tax is mainly based on your personal business income, not the entire household’s gross income, so conservative work-from-home businesses aren’t gouged with high payments.
One of the major benefits of working from home is the tax deductions. Assuming you work every day at your home in a specific office space, you can deduct part of your mortgage and utilities based on the percentage of space used for business only. Even some home improvements are covered as a tax deduction, such as replacing a chair for your work desk. As long as the item or service is only used for a work-at-home business, it is often tax deductible. If you travel to visit clients, for example, a portion of your vehicle expenses is deductible as well. Government rules can change periodically, so consulting a tax professional to discuss deductions is a good idea.
Another thing to consider–did you do any volunteer or pro-bono work? If so, you may be eligible for tax deductions for charitable contributions. The best thing to do is write up a bill as if you were going to charge for the service, then get a receipt for that amount from the organization you helped.
Your income should always be documented to avoid any tax problems. When you work for an actual company as an independent consultant, you should receive a 1099-MISC form each year. Similar to a W-2 form, you report your earnings using this paperwork. If you are in business for yourself, you must have accurate accounting software to document income, gains, and losses.
Featured Image Source: DepositPhotos / robeo123Posted on May 5, 2023