| The self-employed face a number of tax traps | | | | Second, the self-employed must be mindful of the |
| which the traditionally-employed rarely consider. | | | | separate, self-employment tax. The |
| Foreknowledge of these pitfalls is important to | | | | self-employment tax, which is approximately 15% |
| avoiding significant tax burdens, interest and | | | | of earnings, represents Medicare and Social |
| penalties. Two of the more common concerns | | | | Security payments. If this additional tax is not |
| involve the quarterly withholding of taxes and the | | | | withheld by the self-employed, it could result in a |
| home-office deduction. | | | | serious shortfall at the end of the tax year. |
| One of the most important obligations for the | | | | Where a significant shortfall occurs, the IRS, and |
| self-employed is to pay estimated taxes during | | | | the state, can impose penalties and interest on |
| the year. Unlike a traditional employment situation | | | | the amount underpaid. |
| where the employer withholds taxes from an | | | | Many self-employed persons work from home or |
| employee's paycheck during each pay period, the | | | | use a personal vehicle, which leads to another |
| self-employed must make their own withholdings. | | | | area of frequent tax problems: home office and |
| These withheld amounts are typically paid | | | | personal automobile deductions. A taxpayer may |
| quarterly and must be paid both to the federal | | | | deduct as a business expense the pro-rated |
| government and the state government. | | | | portion of their rent or mortgage payment, and |
| When estimating these quarterly payments, the | | | | utilities payments, which represents the area used |
| self-employed should keep two important | | | | for the home office. The home office, however, |
| considerations in mind. First, the taxpayer should | | | | must be used exclusively for the business. |
| estimate the tax rate not on the amount of the | | | | Physically separating the area, such as using a |
| quarterly earnings, but on the projected annual | | | | specific room, is best for this. Also, if a personal |
| amount of earnings. For the self-employed | | | | vehicle is used for the business, the taxpayer |
| taxpayer with a growing business, this may mean | | | | must be sure to keep mileage records for the |
| using a higher tax rate, even on earlier, smaller | | | | business use. Only the business miles can be |
| earnings. A self-employed taxpayer whose income | | | | deducted. |
| fluctuates seasonally--for example, a tax preparer | | | | Finally, the self-employed should consult a tax |
| whose business peaks between January and | | | | professional familiar with both federal and state |
| April--might use a lower tax rate during the busy | | | | requirements in order to deal proactively with any |
| season to offset lower earnings later in the year. | | | | potential tax issues. |