Don't shoot the messenger: You will probably have to pay taxes.

(I am reprinting this article from an earlier post.) 

Most of my clients are self-employed, and many have never filed a tax return.  When I tell them they need to get ready to pay taxes, they don’t understand why.

Say your net income from your business is $36,000 for the year.  Not an unreasonable amount to make – that’s just $3,000 a month.  Since you are self-employed, your self-employment tax on that income is $5,508.  Many are shocked, but here  is how self-employment taxes work:

When you work for an employer, the employer withholds your share Social Security and Medicare taxes from your pay. The employer also pays their share of Social Security and Medicare taxes.  A self-employed individual is both the employee and the employer, and is responsible for paying both the “employer” and “employee’s” share of Social Security and Medicare taxes on the profits of the business.  That percentage is 15.3% and you must pay that tax on your tax return no matter what else is reported on your return.

Here is a helpful tip for the self-employed to manage payment of these taxes. Open a bank account just for your self-employment taxes. Every time you collect a fee, take 15 to 20% and deposit it into a savings account to cover the taxes for that time period. At the end of each quarter, when your self-employment taxes are due, you should have enough money saved up to make your payment. This will reduce the shock and frustration of trying to find the money to make the payment at the last minute. It will also help you avoid the nasty penalties from the IRS for not making your payments large enough or on time.

You can also open at EFTPS account with the IRS.  This allows you to make electronic payments for estimated taxes anytime you want.   I suggest to my clients that it is easier to pay 5 nickles than one quarter.  So spread your estimated payments out throughout the year.  Make a payment weekly, monthly, and it won’t seem like such a financial burden.  The signup is easy and quick.  Just log onto EFTPS.gov, and sign up.

Remember the old saying:  You have to pay to play.  If you want to file taxes, register your business, build a good credit file, buy a home or other large purchase, you are not going to qualify for any loan if you don’t show earned income on your tax return.  And if you have income, you will have to pay taxes.  Look upon paying taxes as an investment in your future.  Not only in reaching your financial goals, but contributing to your social security account so that you will have something to count on when you retire.