These days, a growing number of workers do not have traditional full-time salaried positions. In fact, McKinsey found that approximately 20% to 30% of the working-age population in Europe and the U.S. engage in some form of independent work.
If you’ve made or are making a transition to self-employment, in essence, you have become your own Human Resources and Payroll Department. Those notes on your old paystubs that you may have paid little attention to are likely tax liabilities for which you are now directly responsible.
Most workers are subject to the “Pay-As-You-Go” or (PAYG) system, where income tax is taken from each paycheck and sent to the Internal Revenue Service. It’s no different for the self-employed. The IRS expects you to make quarterly estimated payments if you anticipate owing $1,000 or more on your taxes.
Set Aside Money via a Separate Account
For some, being self-employed may require a little extra planning. Typically, on payday, our checking accounts are flush with cash so we buy groceries, pay the mortgage or rent, and spend some money going out to dinner and drinks with friends. When you are self-employed, draining your account following each pay period could cause you to end up short when it comes to pay quarterly taxes. And, an inability to pay on time or not at all means a late fee or a failure-to-pay penalty from the IRS.
Prevent this situation from happening to you! One way to make sure you can make each payment on time and in full is to set up a separate account specifically for funding estimated taxes. This way, each time you get paid, a part of your tax payment is deposited to this account. Set it and forget it so you don’t end up short!
How Much Should be Set Aside?
A good starting point to determine how much should be put in a separate account for your estimated tax payment is in the range of 30% of each paycheck. It may seem like a high percentage, but you need to account for Social Security, Medicare, federal and any state tax liabilities. Check with your tax adviser to determine the appropriate amount to set aside for your individual situation.
For W2 employees, Social Security and Medicare taxes are shared between the employer and employee. When you are self-employed, you function as both and are taxed as such. For 2017, the tax will be at a minimum rate of 15.3% and can increase if certain income levels are met.
When am I Expected to Pay?
Here’s a handy chart to determine when you need to pay these taxes. The following is the 2017 schedule from the IRS:
NOTE: If the 15th falls on a weekend or a holiday, then the due date is the next weekday.
Find a Trusted Advisor who Relates to You
Whether you’ve been an independent contractor for years or are newly self-employed, you don’t have to figure this out alone. At Jemma Financial, our knowledgeable financial advisors can help you open an account and create a plan to meet your financial goals.
Securities offered through M.S. Howells & Co., Member FINRA/SIPC. Advisory services offered through Jemma Investment Advisors, LLC, a registered investment advisor. M.S. Howells & Co. and Jemma Investment Advisors, LLC are not affiliated.