Making IT Profitable:
A Guide for New Businesses & Freelancers

Chapter 3: Dealing with the Taxman

If you decide to start freelancing or picking up a few contract jobs, you are considered a small business by the IRS.

We can't really emphasize how important this is, so we'll say it in a different way: if you're doing any work for yourself, Uncle Sam classifies you as a small business for tax purposes. While it's probably no surprise that you have to pay taxes on your income, it may be news that, as a small business, you're expected to pay taxes throughout the year — and if you don't, you could be penalized.

And yes, you're required to pay these taxes even if you're only moonlighting while holding down a full-time IT job somewhere else. Here's an overview of paying taxes as a one-person shop so you don't end up with unwanted fees and fines in April.

Who Counts as a Small Business

To the IRS, you're a small business if you…

  • Run a sole proprietorship, LLC, partnership, or corporation.
  • Freelance.
  • Do contract or 1099 work for other businesses.

What Taxes Do You Have to Pay?

Whether your business is a side job you maintain or your main source of income, you'll have to pay taxes for…

  • Medicare.
  • Social Security.
  • Employment.
  • Income.
  • …and maybe other things.

This is because when you're both the employer and the employee (as you are when you own a business or work as a consultant), you're responsible for everything. In full-time work settings, the employer pays these taxes and the employee only pays income tax. Because of these "invisible" costs of running a business, you'll have to charge more for your services than you earned at your last full-time job. This is one reason it's important to spend some time calculating your prices (we'll get to that in Chapter 5).

What Can You Write Off?

Tristan Zier New browser window icon., founder of , a website dedicated to guiding small-business owners through the process of filing taxes, notes that deductions are a great way to minimize the tax bill for a small-business owner, but that it's important to understand how they work. "Many business expenses are partly or completely deductible," he says, "meaning that keeping track of them is a great way to potentially save on your tax bill."

(Of course, not everything you spend on your business can be deducted. Jump to Chapter 4 for more information.)

Next: How to Avoid a Tax-Bill Nightmare

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