Being a sole proprietor or a freelance worker in Worcester, MA, is a wonderful career to have, especially if you planned for it. You are your own boss and can run things as you wish. However, there are many things you will have to learn to do differently than most of your friends and family. Taxes are one of those things.
As a freelance worker, the tax will be imposed on all your net-income (Total income-Total expenses). Tax liabilities will not waive off from any money you withdraw from business. For example, even if you leave money in the company’s bank account at the end of the year to convert future expenses or expand the business, you must pay taxes on that money.
Secondly, the sole proprietors must pay the entire amount themselves. The self-employment tax rate is 15.3%, which consists of 12.4% for social security and 2.9% for Medicare.
How Can You Pay Less Taxes Being a Sole Proprietor in Worcester, MA?
You often hear sole proprietors talking about various expenses as a Tax Write-Off. That can be a huge benefit of owning a small business where you may deduct many ordinary business expenses from your taxable income, which then allows you to be liable for paying smaller tax bills.
You can also choose how much to pay straight away and how much you want to pay each month i.e., installments. But if you do not keep up with your repayments, HM Revenue and Customs (HMRC) can ask you to pay everything you owe.
Just like any other business tax return procedure, being a sole proprietor, you are also allowed tax deduction. That might include your Operating Expenses, Advertisement Costs, Travel Expenses, and some of the cost of the business-related meals, etc. Also, there is an option available to write off certain start-up costs and the cost of business equipment and assets you purchased.
Being a sole proprietor, you also qualify for the new pass-through tax deduction established by the Tax Cuts and Jobs Act. Up to 20% of net business income earned. However, suppose you are married and filing jointly and have income over $3,15,000 or are single and having income over $1,57,000. In that case, you must have depreciable business property or employees to enjoy this deduction limited to a percentage of employee wages or business property cost. Sole proprietors need to keep separate records for their business and personal expenses.
Estimated Tax Calculations:
If you are a freelancer, you need to budget for both income tax and FICA taxes, then you need to set aside 25% to 30% of your taxable freelance income to pay these both quarterly taxes and any additional tax you owe when you file your taxes. You can also take a look at IRS Form 1040 –ES to calculate estimated tax payments.
Penalties In Case of Tax Return Failure:
The penalty for not filing a tax return is 5% per month of the tax balance you owe, up to 25% of the balance you owe. If the IRS says that you intentionally failed to pay the taxes, then the penalty may increase to 15% per month, up to 75% of the taxes you owe.
*See the IRS website https://www.irs.gov for current social security annual income thresholds. Self-employment taxes are reported on Schedule SE, which a sole proprietor submits each year along with a 1040 income tax return and Schedule C.
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Zee Maq is a content writer who specializes in writing business and finance content. She has nine years of experience and loves to provide problem-solving content to help people tackle challenges in their everyday lives.