If you are a sole proprietor or partner in a business, an independent contractor, or just someone with a lucrative side hustle, you need to know about taxes.
There are two main types you’re responsible for: income tax and self-employment tax. When you’re employed by someone else, these taxes are automatically withheld from your paycheck.
As the owner, you are now the one responsible for these taxes, so it’s important to figure these costs into your business’ fee structure right from the beginning so you aren’t left high and dry when tax time comes.
The amount of income tax you owe will be determined by your business income. You can find your tax rate by calculating your business’ net profit or loss. This number is your business income minus your business expenses. You can then use an online calculator to estimate your income tax amount. If it looks like you’ll owe more than $1000, you’ll need to make quarterly tax payments throughout the year.
Self-employment tax refers to Social Security and Medicare taxes. As of January, 2023, the tax rate is 15.3%, with 12.4% going to Social Security and 2.9% for Medicare. Since an employer normally pays half of this, you can claim that half as a deduction when figuring your adjusted gross income.
Since the tax forms you need and any deductions that you may qualify for can be complicated, it’s a good idea to consult a tax professional to help you work out the details and avoid any costly mistakes. You can also find more resources and information at irs.gov.