Joining the Great Resignation: What the Newly Self-Employed Should Know About IRS Obligations
If you’ve recently quit your job in hopes of finding new opportunities, you’re far from alone. As part of the Great Resignation, you are accompanied by many newly self-employed individuals.
An analysis of Department of Labor data from the Wall Street Journal indicates that there has been a 6 percent rise in the number of self-employed workers since the onset of the pandemic. All this requires a major adjustment — including the need to think more about IRS concerns you may have once conveniently ignored.
To ensure that you’re fully prepared for your new life as a self-employed professional, we’ve highlighted a few of the biggest ways in which your tax situation will change:
Set Aside Money For Quarterly Payments
At the outset, you might be impressed by your self-employed earnings. Taxes aren’t automatically withdrawn from these, leaving you with the impression of higher take-home pay. In reality, however, you will ultimately pay more in taxes than you did as a conventional employee — but on a quarterly basis.
Get used to setting aside a sizable chunk of your income so that you’re ready to pay up when the quarterly deadline arrives. The self-employed tax is considerable as compared to standard Social Security and Medicare taxes for conventional employees. With traditional jobs, the employer and employee split this burden (at 7.65 percent each), but self-employed individuals are entirely responsible for paying 15.3 percent of net earnings.
Be Prepared for Audits
While your likelihood of being audited should remain fairly low as you make the transition to self-employment, your new status is definitely more risky from an auditing perspective. Be prepared by keeping careful records (and receipts). Avoid the impulse to go big with deductions on meals or entertainment, as these frequently trigger audits.
As you adjust to self-employed life, it helps to have a trusted tax resource in your corner. Look to the Highland Tax Group for assistance with everything from IRS installments to audit representation.