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.
- 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…
- Social Security.
- …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 , founder of Zen99 , 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