In all of the excitement of getting started as a work-from-home mom, it's easy to overlook one important thing: taxes. No one likes paying taxes; if you didn't have to pay them, you could keep a lot more of the money that you earned as a self-employed individual. The fact of the matter, though, is that you need to get on track with your tax obligations right from the start. If you put off this important matter, you could end up with a really nasty tax bill at the end of the year. By staying on top of things, you won't end up in hot water. While the following information is not tax advice, it will give you a general idea about the basics of filing taxes as a self-employed person.
There are No W-2 Forms
If you've only worked "traditional" jobs in your life, you've probably always received W-2 forms from your employers. Those forms reflect the taxes that an employer has withheld on behalf of an employee. When you're initially hired by a company, they ask you to fill out a W-9 form that they use to calculate your withholdings. You'll still be asked to fill out a W-9 by many websites as a self-employed individual; instead of a W-2, though, you will receive a 1099 at the end of the year.
What is a 1099?
A 1099 form is an official record of earnings that have not had taxes withheld from them. You may be taken aback, after signing up with a site like Textbroker or Demand Studios, to be asked to fill out a W-9. However, such companies have to keep all of their ducks in a row. As such, they need to keep records of how much all of their contractors are being paid. They send one copy of the resulting 1099 to you and send another to the IRS. This is precisely why it is so important to pay your tax obligations on those earnings: The government is going to find out about them.
The Importance of Keeping Records
Although many of the companies that you do work for will send you 1099s at the end of the year, not all of them will. Just because you don't receive a 1099, though, doesn't mean that you don't have to pay taxes on your earnings. Furthermore, it's critical to keep your own records in order to verify the information that those companies is sending to the IRS. If they mistakenly send the wrong information, your tax situation could get really convoluted.
Income Tax and Self-Employment Tax
Most people are well aware of income taxes; they are usually withheld by employers and go to the federal and state governments. As a work-from-home mom, you not only have to pay your income taxes – which will vary, depending on your specific tax situation – but you have to pay self-employment taxes, too. The withholdings that you see on a regular paystub only reflect half of what the government is getting. The other percent is paid right off the bat by your employer. When you are self employed, you have to pay both halves of that tax; you also have to pay for your Medicare, Medicaid and other taxes. Altogether, these are known as self-employment taxes, and you can't use credits to reduce the burden.
Estimated Tax Payments
If you think that you can wait until the end of the year to figure out how much you owe, think again. For one thing, you could end up with a whopping bill and nothing with which to pay it; for another, you are more than likely required to make estimated tax payments. Most states require estimated tax payments; the IRS certainly does. Basically, if you expect to owe more than $1,000 at the end of the year, you need to make these payments.
When to Make Estimated Tax Payments
Estimated tax payments are due on a set schedule. If you choose not to make them, you could face fines and penalties at the end of the year. The due dates for estimated tax payments are usually April 15, June 15, September 15 and January 15. However, those dates can change, so always double-check before making your plans. Since these are quarterly payments, it makes sense to send one-quarter of the total amount of your expected yearly tax bill each time. Your final payment should catch you up completely. If you do this right, you shouldn't overpay or underpay. You can pay your federal taxes online; some states accept online payments, while others do not.
Business Expenses
A popular option is to write off as many business expenses as possible, in order to lower your tax obligation. It is important to be very careful when doing this. If the IRS sees too many "iffy" expenses, they could start an audit. It's generally safe to write off all or part of your Internet bill, the price of a new computer that you are going to use primarily for work and things of that nature. If you ever use your phone to communicate with clients, you could write off part of your phone bill. As always, though, everyone's tax situation is different. It is imperative to sit down with a tax professional to find out what you can legitimately write off.
The best way to start off on the right foot as a work-from-home mom is by setting up a meeting with a tax professional. He will help you learn the basics about setting aside money for your estimated taxes. That way, you will be able to make those payments on time without any issues. It may be depressing to set aside largish chunks of your earnings for taxes, but it's vastly preferable to owing the IRS a bunch of money. It's also a lot smarter to know what you're getting into, instead of turning a blind eye to the situation. To run a successful work-from-home business, it definitely pays to be smart about your taxes!