Self-Employed for the First Time? Don't Forget Estimated Taxes!

Filed in archive Taxes on May 21, 2008

© Lisa Norwood

I've been self-employed many times. It suits me, as I dislike people and prefer to be 100% alone. (That's a joke, although truth be told I have always been a bit of a loner.) Being your own boss is great - set your own hours for the most part, few senseless meetings where everyone gets together for a supposed purpose but really just ends up bitching about their jobs, and no co-workers stopping by your office to gab when they are short on work but when you have plenty (or when they have plenty of work but are procrastinating).

One big downside to self-employment: taxes.

First off, when you're self employed, you pay your own Social Security taxes; there's no employer to kick in half. You do get a self-employment tax writeoff for this, but the fact is you pay more in Social Security taxes than employees of a company.

Second, no one takes taxes out of checks you receive. You have to figure the tax yourself, and each quarter you have to send the various governments some money to cover your tax burden. So, if you get a check for $2,000, you have to immediately think of it as $1400 (or whatever, depending on your tax rate), because the rest has to go to the government.

Estimating your taxes can be tricky. If you have a pretty stable income from self employment, it's not difficult, especially after the first year. When I was self-employed, though, my income varied rather widely, and I was always unsure of what I should be holding back from my income for taxes. One year I got a nasty surprise when I owed a ton more in April than I bargained for. I used an accountant, and he always encouraged me to call or meet with him quarterly to make sure I was putting enough aside, but I was too cheap - I didn't want to pay the accountant for his time, so I just winged it. Big mistake.

Anyway, if you're getting into self-employment for the first time, study up on this stuff, because you can really put yourself in a tough position if you get it wrong.