This post may contain affiliate links.
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
- 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!
- 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.
- 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.
- 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!