When you own your own business, it can be one of the most rewarding things that you can do with your life. Working for yourself without having the boss standing and looking over your shoulder all the time is a dream come true. But, when you are independent and self employed you are going to run into a whole different set of problems, one of the main ones would be learning how to take care of your business taxes in the right manner to avoid getting into hot water with the IRS.
When you own your own business not only are you expected to file the same old same old 1040 for an income but you will also be expected to fill out two additional tax forms. One is called Schedule C which is basically a profit and loss form and then there is the Schedule SE which is basically a self employment tax form. The Schedule C form is a form that allows you to put your business in a category and then allows you to be able to itemize all of your income as well as all of your expenses for the year. The SE form simply helps you figure out the taxes for self employment.
It's a pretty unfair practice since you are being taxed double, but to avoid the IRS being on your back you need to do your best to take care of this. Even if what you are doing is just a hobby, if you happen to earn more than $400 in a year from that hobby, the IRS expects you to pay a self employment tax form.
When you are self employed you need to be able to budget yourself so that you can pay taxes on a quarterly basis. If you don't set up a regular plan to pay quarterly you will discover quickly that the IRS will add penalties for what they consider are late payments. The IRS doesn't care if you work for an employer who pays the self employed taxes or if you are the self employed party, they just want their money, or what they perceive to be their money.
Probably one of the biggest errors that the self employed make is the simple fact that they forget to put aside enough money each month to be able to cover their taxes from the money they have earned each month. You need to have to have a lot of discipline to be able to do this on your own, but to be able to be successful at being self employed you need to learn this kind of discipline. It can be quite tempting to spend all of the money you earn and forget about those taxes that are waiting for you at the end of the quarter. Remember it this way, when you worked for someone else you never were allowed to take all of what you earned home with you, so it unfortunately needs to be the same way when you work for yourself. The best thing you can do is take out a reasonable percentage say at least 25% of your earnings and sock it away for taxes.