Self-Employment Tax

As you consider self-employment or plan on becoming self-employed, you need to learn about self-employment tax. The amount of self-employment tax and how you pay them depends on what type of business structure you choose (sole proprietor, corporation, etc.). Don't be too intimidated by unfamiliar terms or the IRS there is a lot of help to navigate them.

To get a general sense about self-employment taxes, we recommend:

IRS Self-Employed Individuals Tax Center. Pay close attention to their Business Structures article. Being self-employed doesn't mean you have to be a sole proprietor. You can also incorporate your business and become its sole employee. This may save self-employment taxes, although start up costs are slightly higher in the beginning. Learn the pros and cons of your options.

About.com's Self-Employment Tax article explains the tax for sole proprietors in laypersons' terms.

Nolo.com's Small Business section covers taxes and business structure. Check your local library for Nolo's self-help books on a variety of small business topics.

Freelancers Union Blog's "tax help" posts. You'll get helpful tips like, "How to Pay Your Taxes Four Times a Year and Love It." The Freelancers Union website has many other helpful resources.

It's important to get self-employment taxes right. Kiplinger publishes a "Dirty Dozen" top reasons for IRS audits. On that list are taking the home office deduction, deducting business meals/travel/entertainment, and having deductions exceed your income.

When deciding whether to hire professional advisors, consider your strongest Holland personality types and the results from your S-E Entrepreneur Test. Are you more Enterprising and Conventional interested in finance, detail and process oriented? If so, you might do more yourself.

If not, consider learning tax basics and then hire a professional, especially when you start and set up your business. Getting a good start will save you time, stress and money in the long-run. Network with other self-employed business owners to get personal referrals. The Small Business Administration (SBA) also has great tips for finding and interviewing a good accountant and when to hire a small business lawyer.

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