4 Tax Tips For The Employee To Self-Employed Transition

The ability to work for yourself is a significant accomplishment. No longer are you bound by an employer; you now have the say-so over your earnings potential. However, being self-employed comes with a great deal of responsibility and planning, especially regarding taxes. To ensure you can maximize your profits, learn about some of the tax changes you should make with this transition.

Save Every Receipt

Get in the habit of saving every receipt related to your work. Only the money you earn is part of your tax requirements as an employee. As a self-employed person, the amount you make and spend is factored into your taxable income. While not always, there are instances when the IRS will request verification of your expenses, usually in the form of a receipt. Maintaining your receipts ensures you are prepared for this instance and makes it easier to prepare the taxes. 

Establish Quarterly Payments

Employees have their taxes withheld with each paycheck involuntarily. However, for self-employed workers, taxes are due more voluntarily. The general rule of thumb is for workers in this group to pay their taxes due quarterly, which is essentially every three months. If you fail to pay your taxes by this schedule, it is not necessarily against the law, but your due taxes will have a penalty applied to increase the amount owed. Paying on time makes more sense. A tax planner can help with this step.

Designate Employees

A transition to self-employed is often a major move, so it is common for people to enlist the help of friends and family to assist with the new workload. If you provide any form of compensation to these individuals, designate them as employees. Each employee serves as a tax deduction. While the employee will have to pay taxes on their income earned, the taxes due will be considerably less than the self-employed rate.  

Plan Expenditures

Being self-employed means you will have certain expenses you must cover, including the cost of equipment. Always plan when is the best time to make these purchases. For example, consider someone with unusually high earnings in December who planned to purchase a new computer in January. Purchasing the computer before December 31st will allow the individual to start depreciating or deducting the computer in the same year, which can help offset the additional taxes due for that period. 

The above represents just some of the tax changes that benefit self-employed individuals. You will want to speak with a tax planning professional to learn about additional options available to you.