When an individual works for themselves, he or she is considered self-employed for taxes, which means the individual is responsible for paying and filing taxes on a scheduled basis. These individuals will have some advantages and disadvantages at tax time.
Five Tips For Self-Employed Taxpayers
- A self-employed individual will have to pay income and self-employment tax. The self-employment tax includes Social Security and Medicare taxes. Normally these taxes are withheld from an individual’s wages, but a self-employed individual will have to pay these taxes by filing a Form 1040 Schedule SE. However, the individual does get to deduct half of this tax from his or her income on Form 1040.
- The earnings will need to be reported on a Schedule C or C-EZ Tax Form. This form will show whether an individual made money from a business or had a loss from the business. It will be used in addition to the Form 1040 and Schedule SE.
- Sometimes, a self-employed person will have to make estimated tax payments during the year. Even though some people work as an employee on other jobs with taxes withheld, it is still important to make these estimated taxes if an individual has any self-employed income. An underpayment of taxes at the end of the year could result in a penalty. Therefore, making quarterly estimated tax payments will save the individual from being penalized for underpaying.
- If an individual had business expenses, these will be listed and deducted from the Schedule C earnings. The expenses must have concurred during the current tax year to claim as a deduction. A business expense is one that is common and necessary for the operation of that business.
- Many common deductions can be overlooked, such as printing business cards and postage. Forgetting about a deduction can cause an individual to pay more taxes.
An independent contractor or sole proprietor of a business will have different tax obligations than an employee. For instance, the self-employed individual will pay more Social Security and Medicare taxes than an individual who is not self-employed. An employer will pay part of these two taxes for their employees, but a self-employed individual will be responsible for all of the taxes.
How to Estimate Self-Employment Payments
- An individual can use the income tax return from the previous year to get an estimate for payments.
- Look at the income and the self-employment taxes to figure the payments.
- If this is the first year for self-employment, the taxes can be estimated based on the income that an individual plans to earn that year.
- Adjustments can be made to the estimated payments after the first quarter if the estimate appears to be too low or too high.
Self-employed individuals need to file accurate tax returns with the proper deductions. Keeping good records throughout the year will ensure that no deduction is overlooked. At the end of the year, the taxes will be easier to file when the information is accessible along with estimated payments.
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This article will focus on 401k plan participants expressed desire for help with asset allocation strategies; but, with a twist.
The author just finished reading a white paper prepared by ING Retirement Research Institute released on 3/31/2011. The title of the report is “Shedding Light on Retirement.” 2,600 401k plan participants were surveyed by the Boston Consulting Group on behalf of ING. One commentator took the report and proclaimed that the report indicated plan participants wanted help from their employers with asset allocation strategies. In fact 89% of the respondents said this was the help they wanted.
This is why I always prefer to read source material. Yes, the plan participants did say they wanted this help. However, in looking at the report, there were notable paradoxes in the responses. Specifically, 79% said they want control over how they invest; yet, over half stated they want more guidance, a roadmap, from their employer. In addition, 76% stated they want more investment choices; however, over half said they do not know how to achieve their retirement goals.
ING’s response to this survey was to create a website to help participants with education and offer personal contact, if they wish.
I suppose that is one solution. Perhaps another solution would be for employers to include professional 401k advisors for face-to-face, employee consultations. Survey participants seemed to suggest this is what they wanted; but, will such an offering by employers expose them to the Fiduciary Liability that they were so anxious to avoid when they terminated defined benefit plans?
Perhaps the responsibility is on the employee to realize they are truly on their own to find finance professional for themselves. Asset allocation strategies are not the only thing that 401k plan participants desire. Many said they need help determining how much money they will need to take them through their retirement years and they also wanted help with an annual checkup to see if they are on track. Perhaps 401k advisors are the answer. The real question is how to deliver the service.
As an employer, small business owner or self-employed individual, there are a lot of factors that you need to work out to keep the company and/or the business growing. You have to monitor employee’s performance, keep expenses within the budget, and many more more. Another possible source of problems and worry is which type of retirement plan to choose for yourself and for those under you. Of all plans tailored for small business owners and the self-employed, a SEP IRA is probably the best retirement plan you could choose. But does is suit your needs and preferences? Here are 3 common concerns of people choosing their retirement plan:
Do you want a plan that is easy to setup?
A SEP plan is very easy to set up. As an employer, you will be responsible for setting up the SEP by filling up Form 5305-SEP. Employees on the hand are the ones who will open their individual IRA accounts that will fall under the SEP. Both parties must agree to the terms of the SEP.
Are you concerned of contribution rules?
With a SEP, contribution rules are very flexible. In this plan, only employers are allowed to contribute to their employees’ IRAs. All contributions made by the employer cannot be deducted from the employee’s salaries. While this may seem like a loss for the employer, any contribution made is 100% tax deductible.
When I am at retiring age, how will the money be distributed?
In the SEP plan, withdrawals can be done starting age 59 ½ and required distributions start at 70 ½. Any withdrawal done before age 59 ½ is subject to penalties and taxes. Since required distributions start a later time (10 years) compared to other retirement plans, your money has more time to grow until the required distributions start.
even if your moving from one company to be self employed, you can do a rollover 401k into a sep ira.
So, is a SEP IRA what’s best for your needs?