Being an entrepreneur comes with its own unique set of tax challenges. Self-employment taxes can seem complicated and overwhelming, but they actually boil down to four important categories. According to Accounting Web, the following four key issues are vital for anyone self-employed to understand and monitor.
Just like any other member of the workforce, all self-employed individuals are responsible for income taxes. Your federal and state income tax bracket will depend on how much your business makes. Your business income is comprised of all your revenue less your deductible business expenses. For tips on how to lower your self-employment taxes, read our blog post here.
In a traditional employment situation, the employer pays a share of the Social Security and Medicare taxes levied on all employees. However, if you are self-employed, you are essentially responsible for both the employer and employee portion of these taxes. Unfortunately, this means that you pay double the taxes of an employee of a company. For 2019, the self-employment tax rate is 15.3% of all income up to $132,900 and 2.9% of income above this number. This tax is an unfortunate reality of being an entrepreneur, but you can lessen its sting by deducting half of your self-employment taxes on your annual tax return.
Other Payroll Taxes
If your business has employees, you are responsible for half of the Social Security and Medicare taxes that we discussed above for each individual in your employ, as well as unemployment and disability tax. You must also withhold income taxes from the paychecks of your employees and make the required deposits to the IRS in order to avoid a trust fund penalty.
You are also responsible for collecting sales tax on products that you sell. If you are a brick-and-mortar store, simply observe the tax laws in your area. However, if you also sell online, you may need to collect sales tax from the region in which your buyer is purchasing. Rules regarding this taxation vary from state-to-state.
As an entrepreneur, taxes can seem frustrating and overwhelming. After all, you are accountable for paying proper taxes not only for yourself, but on behalf of your employees and your business. That’s a lot of responsibility! However, by understanding the rules of income tax, self-employment tax, payroll taxes, and sales tax, you can ensure that you are paying the proper amount and avoid the headache of an audit or trust fund penalty from the IRS. Knowing your duties as a self-employed taxpayer brings you peace of mind and keeps your energy where it should be: on running your business.