When it comes to taxes, individuals who are self-employed often have a lot of questions and concerns. An individual who is classified as an employee of a company is likely aware that taxes are withheld from each paycheck, however, an employer picks up half of the tax-related costs to fund programs like Social Security and Medicare. For a self-employed individual, he or she is 100 percent responsible for paying these tax costs.
Self-employment tax laws require that individuals who are classified as being self-employed pay taxes via "quarterly estimated tax payments." Like most tax-related matters, the actual process of calculating how much tax one owes can be confusing and rather complex. It's wise, therefore, that self-employed individuals consult with a legal tax professional who can answer questions and provide guidance and advice in the event an individual believes that he or she erred on past tax returns.
Along with having to pay many of the taxes that individuals who are not self-employed likely don't pay much attention to, a self-employed individual must also ensure that he or she is taking full advantage of certain tax credits. For example, an individual may get a tax credit for paying in to Social Security as well as taxes related to Medicare. Additionally, there are cases where a self-employed individual can avoid paying capital gains taxes.
A self-employed individual must, however, be careful not to get carried away with taking tax credits and other business-related deductions as doing so could raise a red flag to the IRS and result in an individual incurring fines and penalties. In some cases, an individual's creative tax preparation skills may even result in criminal charges of tax evasion or tax fraud.
For these reasons, it's always wise to consult with a tax attorney who handles a wide array of tax matters and can answer questions and help ensure a self-employed individual is tax compliant.
Source: MartketWatch, "Self employed? Prepare to pay up," Bill Bischoff, Aug. 22, 2015