Self-employment definitely has its perks, but being the master of your own ship also means answering to the IRS. Before jumping into your entrepreneurial adventure, make sure to learn the practicalities of self-employment taxes. Below are some crucial points that tax experts suggest any novice entrepreneur consider prior to making the leap.

Determine Your Business Structure

Your business structure affects how your taxable income flows through to your personal tax return, so you’ll need to decide which of the following your business will be:

• Sole proprietorship: business income, expenses, gains, and losses should be reported on Schedule C (Form 1040). You’ll be responsible for paying self-employment taxes such as Social Security and Medicare.
• LLC: a “limited liability company”, this is a state-level designation that is not generally recognized for federal tax purposes, so the owners list business profits and losses on their personal tax returns. If the LLC chooses to tax itself as a corporation, it must follow corporation tax law and filing requirements.
• Partnership: this type of entity generally does not pay federal income tax, but must file an information return, which are tax documents (Form W-2) that businesses and tax payers must file to report certain business transactions to the IRS. An individual’s partnership share is typically reported on Form K-1.
• S-Corporation: similar to partnerships, business income usually flows through to personal tax returns, but the business owner typically sets a salary and withholds payroll taxes at the corporate level. Some or all of the owner’s income may be reported on a Form W-2 at year’s end.
• C-Corporation: profits are taxed at the corporate level, but as it’s recognized as a separate tax-paying entity for federal purposes, this specific business structure may be able to take special deductions.

Prepare for Quarterly Taxes

As an entrepreneur you need to pay your taxes quarterly. They are typically estimated payments, made with an IRS Form 1040-ES. They include the tax payer’s income and SE taxes. Payments can be made via check to the U.S. Treasury or online through the IRS’s website. Payments can also be scheduled up to a year in advance and automatically withdrawn on pre-determined dates through the government’s Electronic Federal Tax Payment System (EFTPS). How you calculate your estimate will depend on your business structure, and a tax professional can help guide you through this process successfully.

Be Aware of Penalties

In order to avoid penalties, the self-employed can make quarterly tax estimates based on the current year’s revenue or use safe harbor methods in order to avoid penalties, such as an underpayment penalty. Two examples of safe harbor methods are:

• If the prior year’s adjusted gross income was $150,000 or less ($75,000 if filing married filing separate), pay 100 percent of the prior year’s tax liability evenly for each quarter.
• If the prior year’s adjusted gross income was greater than $150,000 ($75,000 if filing married filing separate), pay 110 percent of the prior year’s tax liability evenly for each quarter.

Keep in mind that safe harbor methods are estimated based on the previous year’s earnings, so if your income in the current year is significantly greater or less, once tax time rolls around, you could potentially have an unexpected tax liability or receive a refund payment, respectively.

Up Your Record Keeping Skills

The self-employed enjoys a higher chance of being audited by the IRS, so organized and specific financial records are a must, starting with separate bank accounts for business and personal use. This aids greatly in ease of tracking income and expenses. Bookkeeping, whether by app, paper, or a program such as QuickBooks, is also recommended. A calendar can also help with tracking travel expenses and mileage. Whatever methods of record keeping work for you, bookkeeping skills will help prepare your company in the event of an audit.