Self-Employment Taxes: Working From Home

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I really do love working from home.

I love that I can work for people in Florida, Massachusetts and France. I love that all I need is a half-decent computer and internet connection. I love that I have some flexibility in my schedule so if I need to go to get a whooping cough vaccine at 2 p.m. on a Tuesday, I don’t have to request time off.

But like any job, it has its downsides. The biggest? Self-Employment Taxes.

Of course, not all work-from-home gigs require you to pay self-employment taxes. In fact, I’m an employee for one of my three main jobs right now, meaning my taxes come out of those paychecks “normally” every month.

But today I just wrote a hefty check to Uncle Sam for all the taxes I didn’t pay yet this year, and even though I was expecting it and had saved for it — it hurt!

You see, when you work for yourself you don’t only pay the employee side of your taxes — you pay the employer’s portion too. That means your tax bill can easily climb up to 30% of your total earnings, although ours hovered at around 15% this year based on a million other factors that I really don’t understand. (That’s why we hired an accountant, and it was the best money we’ve spent this year!).

This was the first year that my freelancing income made up a major portion of our overall earnings (about 30%), but I really didn’t have a tax-payment-plan except “hand it over before April 15th.”

This year, however, I’m playing things a little smarter, especially because my self-employed wages will be closer to 50% of our total earnings for the 2017 tax year!

Preparing for Self-Employment Taxes

  1. Setting aside the dough. In 2016, I just left all my extra untaxed income (what we didn’t spend!) in our checking account. This was unwise because when I had to write the check it felt like we were losing a lot of money, when in reality, that money was never “mine” to begin with. Had I worked for an employer, it would have gone right to the government anyway. This year I created a new online bank account to move about 20% of my earnings into each month. Hopefully that will cover everything that the IRS needs from me and if I can’t see it, I might not feel like I own it!
  2. Sending in quarterly payments. Our tax-preparer recommended this, and I think it’s wise. Instead of sending the IRS a giant check in April, send four quarterly payments. The IRS is happy because it wants my money “now,” and I’m happy because those smaller checks don’t hurt quiiiiiteee as much.
  3. Hiring an accountant. Ok, fine, I did that this year too. BEST LIFE CHOICE. I had earned income in two states and a foreign country from people in five states and one in a different foreign country, and between my husband and I, we had worked for more than 10 different people/companies (rough estimate, I’m too lazy too count). We almost strangled each other trying to make sense of our taxes our first year of marriage, and I vowed to NEVER do that again. This year I compiled a handy spreadsheet and sent off a load of documents to a wonderful family friend, and he came back to us  a month later with a couple pieces of paper for us to sign. Time is money, and it was a huge savings to let an expert do the work.
  4. Keeping better records. Even though I just had to compile documents and make a spreadsheet, I did end up spending a couple hours doing so because I hadn’t kept the best records. What do I mean? I didn’t keep track of all the folks I did work for, the invoices I sent them, and the money they sent me, which is ok when you can expect a 1099, but even then you are trying to remember who has and hasn’t sent your tax documents in. So this year I’m writing it all down ahead of time so I don’t forget anything!

So there you have it! Do you have to pay self-employment taxes? What’s your system? Share in the comments!

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