Being self-employed is a dream many wish to enjoy. Finally, you’re free from the limits of working as a full-time employee. When you’re self-employed, you have autonomy over your time. You may earn more. You get to enjoy so many more of the things you may not have gotten to do when you were still an employee.
But, it’s not always just happy times. To enjoy the perks of being self-employed also comes with a lot of hard work. It may be so much more work than if you were only working for someone else. Now, all the responsibility of leading an organization is on your shoulders, including matters like salaries, taxes, and whatnot. Taxes, in particular, are very taxing (as aptly named), especially during the tax season.
As a self-employed individual, you wouldn’t want to face all the trouble of being charged with tax penalties. It isn’t only cumbersome, but it can also make your tax processing more complicated. To avoid this situation, here’s a good read for you to remember.
1) Register And Apply For The GST
GST stands for goods and services tax. As an entrepreneur, this is something you’ll need to register and apply for. More so, when you’re self-employed running your own business, you have to register for GST as something which may be compulsory.
Depending on where you’re from, the GST can be between 7% to 12% imposed on the supply of nearly all goods and services in your country. There are varying factors to consider when GST is a must, so it’s best to check with your accountant as well.
Don’t wait it out. As soon as you have a business up and running and falls under the requirements for applying to the GST, register for it immediately. Some good reasons to do so include:
- It reduces the risk of unnecessary interest and penalties;
- It helps boost your image as a business entity when you collect GST;
- It may open you up to savings if you register early.
2) Avoid Underpayment Of Taxes
One of the main reasons you could be penalized is when you underpay your taxes, either unknowingly or deliberately. Whatever you do and however challenging the business’ economic times is, never underpay your taxes. When you’re caught doing so, you might just be charged even more in terms of the penalty than how much you would’ve paid for the appropriate tax.
Generally, to avoid underpayment, you must pay at least 90% of the taxes owed in a given year and 100% of the tax liability from the year before that.
3) Figure Out When And How To Pay
If this is your first exposure out into the world of self-employment, one of the most confusing points to decipher is when and how to pay your tax obligations. Yes, you’re probably aware of when the tax month is in your country (usually April), but that’s not all it is for you to know about taxes.
Remember that when you’re self-employed, you may need to pay a certain estimated amount of taxes for every quarter. Those estimated taxes can kick in if you receive income not subject to withholding tax like:
- Taxable alimony;
- Interest income;
- Business earnings;
- Gains from sales of stocks and other assets.
4) Don’t Run Away From Your Tax Obligations
This fourth tip on this list might be obvious advice, but it’s still worth discussing anyway. It’s a wrong notion to think that paying for the penalty is alright, only to avoid the stressful tax season. Or, perhaps you would want to wait it out.
Never have that kind of notion in mind. Rather than think of it as something alright and acceptable, better face the reality that paying for the penalty is never worth it. Yes, you may be able to put off all payments until April 15th or whenever your tax season is, but avoiding those tax payments will only lead to more penalties. When you’re practical about it, that’s a few hundred dollars you could’ve at least put in a savings account. It’s wasteful.
Henceforth, never entertain the notion that it’s alright to pay for the penalty. The more you think of how you should never pay for it, the more cautious you’ll be about not crossing the deadline.
5) Deduct Self-Employment Tax
You’re eligible for specific deductions on your tax payable amount when you’re self-employed. Be mindful enough about those deductions to avoid penalties. It happens when you think you only have to pay a specific tax amount because of them. But, those deductions aren’t filed on time that’s why they still appear as payables. In effect, you may incur a higher tax amount. Because you paid less, you may be charged with penalties, when in fact, those penalties shouldn’t have existed in the first place.
Two of the most common deductions are the payments you put into Medicare and social security, also referred to as the self-employment tax. Making the proper deductions can reduce what you owe overall, which means reducing the chances of being charged a penalty.
If you’re unsure what your eligible deductions are, always consult your trusted accountant. They can give you the best and most accurate data regarding these matters so that you don’t miss out on anything important.
6) Learn How To Figure Out How Much You Owe
Lastly, to avoid self-employed tax penalties, you also need to figure out how much you owe, tax-wise. It has to be done accurately, with or without a lawyer helping you out. Come up with the closest and most accurate estimate of the income and deductions to reflect on your tax return documents.
Some of the items to help you determine this with certainty are:
- Your previous year’s return, as the amounts may more or less be the same;
- Your record of any tax payments you may have already diligently paid and covered in the year.
All that said, however, this guide isn’t to substitute, in any way, sound advice from tax experts and accountants. The rules and laws governing tax penalties and tax payments can still differ from one state and country to another, so that’s something you have to consider. Let this only be your general guide, so you aren’t as clueless as you may have used to be. Tax penalties can be a hassle for you, so that’s something you’ll want to avoid at all costs.