2020 has forever changed the world in countless ways. Things aren’t going back to how they were before, and in many cases, that’s a great thing. More of us will be working from home and cutting down on needless commuting, saving time and energy in the process. For others employment is in flux. Once solid industries are in trouble and, despite often generous government support for job retention and furlough schemes, jobs are vanishing and the unemployment rate is set to soar.
As a result, many more people are seriously considering alternative ways of earning an income. Some of us are diversifying our source of paychecks by starting businesses. Some of us are taking on more freelance or independent contractor work. Some of us are working on side hustles or turning our hobbies into a source of income. There’s no saying how long things are going to be slowed down because of the coronavirus outbreak, so it is wise to be prepared and to plan for potential alternative futures..
When it comes to being self-employed in any of the above ways, a lot of people can get nervous about doing their taxes. No longer is the tax calculated for us and removed from our paychecks before we even get the money. Instead, we get the full payment, and then we need to figure out what our taxes are going to cost and put that money aside for when we file our taxes. This can be a little daunting, to say the least, especially because no one wants tax season to roll around and realize suddenly they owe a lot more than they saved up.
The following will explore the knowledge and tools that you need to calculate what you can expect to pay in taxes for your self-employment income. Of course, every country is slightly different and there are different tax credits for different things so always be sure to speak to a professional accountant in your country if you’re unsure of the tax implications for your particular situation. As well, it’s important to note that the following is going to help to gain the best estimate of your taxes possible. It cannot guarantee to tell you exactly, 100%, what your taxes are going to cost you.
Gather Together Your Records (Or Start Keeping Good Records)
If you are self-employed and not keeping good records, this is the first thing that needs to be addressed. You should have a document (backed up as well, in case anything happens to one copy) that contains all of your business income including a breakdown of what you’ve charged that makes it clear why each customer or client paid what they did.
You should also have a document (again, with a backed-up version) that details exactly what it has cost to run your business. This could include the price of office supplies, computer software programs, gas money and the cost of maintaining your car if you need to drive for work, licenses you had to pay for, domain and hosting costs for your website, electricity costs for running your computer, etc. Make sure you are fully aware of the range of expenses that could be tax-deductible, for example, a proportion of your household bills. You should be 100% aware of how much it’s costing you to have your business up and running.
If you don’t have these two things, get them in order ASAP. Don’t beat yourself up, we’re all learning, but you need to have these records and you need to keep them up to date. Ideally with receipts and invoices for all of your work. You’re not going to be able to accurately estimate your taxes unless you know how much money you’re making and what things you can deduct taxes from.
For Those In The United Kingdom:
If you are self-employed in the United Kingdom, you’ve lucked out a teeny bit because your government provides a business tax estimating tool online. All you need to do is pull out those meticulous records mentioned above, and fill out the online tool. You’ll get an estimate within minutes. Of course, as the year progresses, your income might fluctuate and that’s fine. You can always come back to the tool and update your entries to see what you can expect to pay.
For Those In The United States Of America:
If you are self-employed in the United States, there are tools available to help you calculate a strong estimate for your taxes as well. This is especially helpful as, for you guys, the taxes you pay can change state by state. You need something that takes into account where your work is done. There are even apps that let you continually update information as it changes so you can have a clear idea of how much you need to have saved. More than likely, you’re going to be identifying as an independent contractor, which means you’re going to have to understand your 1099 tax rate to make this work. Many of these tools also help you calculate deductibles. If done properly, you can perform these calculations and get an accurate result after.
For Those In Canada:
Like in the United States, you will be paying different taxes based on the province that you’re working in (with particularly drastic differences if you’re located in Quebec). There are tools available to help you calculate what you can expect to pay, though they are not as user friendly. More than likely, you’re going to be doing some calculations yourself based on the information provided by the government of Canada on their website. Many industries in Canada have additional deductibles available so make sure to do your research. There’s a fair bit of money to be saved if you’re paying attention.
With the above information in mind, you’re well on your way to facing tax season as a self-employed individual with confidence. As with any financial advice online, it is important to speak to an accountant or a financial advisor to make sure you’re doing the absolute best thing you can be doing for your particular situation. All businesses are different, which means that all business taxes are going to be a little different as well. One thing is for sure, the sooner you do your research and begin keeping solid records, the more prepared you will be (and the more money you’ll save).