Know Your Self-Employment Tax Obligations by Tony Martinez

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Know Your Self-Employment Tax Obligations by Tony Martinez

What often attracts people to investing in tax liens and tax deeds is the opportunity to be self-employed. Yes, you can simply invest retirement funds within your qualified retirement plan and not worry about tax implications, but for those who want to make a living in real estate it is important to understand there are very different tax obligations for self-employed individuals.

How do you know if you are self-employed?

You are self-employed if you conduct business as a sole proprietor, an independent contractor, or as a member of a partnership. Basically, you are self-employed if you are in business for yourself and no one else. With the achievement of this dream comes a little more responsibility. It would be wise to hire a CPA to file the additional and likely new forms on your behalf come tax season, but there are helpful online tools that can help guide you if you are a ‘do it yourselfer.’

What will my taxes be like?

Often it is recommended that self-employed individuals pay quarterly taxes, and may be required to. People who own their own businesses must pay self-employment (SE) tax as well as income tax. SE tax is social security and Medicare tax combined. While SE tax is typically withheld from most peoples paychecks as well as matched by their employer, it is not if you work for yourself. You are required to pay these taxes if your net earnings were above $400 for the tax year.

Self-employed individuals pay a rate of 12.4% for social security and 2.9% for Medicare. Fortunately social security tax is only applied to the first $127,000 of net income. But keep in mind there is no income cap on Medicare tax.

Tax deductions

If you use part of your home to conduct your business, you’ll likely be able to deduct these expenses. This deduction is available to renters and homeowners alike. Don’t forget that travel and entertainment expenses for your business are deductible as well. Even insurance. Take advantage of all the deductions businesses are allowed by educating yourself about them.

The IRS has many helpful videos and eBooks that guide taxpayers through their requirements.

How to choose a tax preparer

It’s common sense; don’t let someone handle your taxes if they promise ‘bigger’ returns. Also do not hire a tax preparer who bases their fees on your returns. You should always look over any tax documents before signing them, as you are still legally liable for the information on them.

Take the time to interview preparers to make sure they have experience and have reasonable rates. Ask close family and friends for referrals.

Sincerely,
Tony Martinez