Entrepreneurs, Has Your Income Tax Bill Risen? Why It Has and What To Do

More Americans than ever are taking up side hustles or using simplified business environments to become entrepreneurs. This can be one of the best moves many make, but it can also create unexpected tax bills. Why might your taxes suddenly look very different as an entrepreneur? Why is it important to manage your tax bill? And how can you do so? Discover a few answers to your questions. 

Why Are Self-Employed Taxes Different?

All taxpayers file the same common sets of income tax forms, including the standard Form 1040. So why would your tax obligation look different when you start your own business? There are several reasons, some of which you can avoid and some of which you can’t.

One of the biggest changes is the self-employment tax. This tax takes the place of the FICA taxes withheld from employee paychecks. Both are mandatory contributions to Social Security and Medicare. However, while employees only pay the employee share, the self-employed pay both the employee and employer portions. This doubles the amount owed by the taxpayer, going from 7.65% to 15.3%. 

In addition, most American workers rely on their employer to withhold money from each paycheck to fulfill their tax obligation over time. However, when you work for yourself, there is no one to perform this service for the entrepreneur. Failure to make estimated payments or have their tax obligation covered through other payments and credits may leave a large unpaid tax bill.

Finally, income may be taxed differently depending on your business structure. A sole proprietor, for example, is generally taxed on all their business profit whether or not they used it as income. However, the owners of an incorporated business may only have to declare the income they actually took from the business profits.

How Can You Avoid Future Problems?

Being forewarned is being forearmed, they say. And this is true of the tax issues that often arise for new entrepreneurs. You may be able to do additional tax planning to lower your personal and business tax bill, such as timing the purchase or sale of assets and maximizing tax-advantaged deductions like retirement contributions.

Many independent contractors will need to raise the amount of money sent to the IRS and state tax agencies throughout the year. This requires diligence and planning, though, since estimated tax payments are not automatic as they are when paid through an employer’s paycheck withholding. You may also want to meet with a qualified tax service more than once throughout the year to stay on track. 

What If You Already Have Tax Issues?

Of course, planning ahead doesn’t fix the problem if you have already wound up with tax bill surprises. What should you do now?

First of all, don’t ignore the problem. Owing money for back taxes can have detrimental effects in many ways. The tax agencies have broader collection powers than most civil creditors, including the ability to seize assets. Your business or licensing can be penalized. And additional penalties and interest will accrue as long as the money is owed.

The next step is usually to verify that you really do owe the taxes. You might get a second opinion on prior tax returns to verify their accuracy and ensure no missed opportunities to save.

If you do owe, the IRS has several programs which may help you pay less than the stated amount—including penalty abatement and offers in compromise. Fresh Start programs also provide methods to pay off debt over time. The sooner you tackle the problem, the better.

Where Should You Start?

Don’t let unexpected tax bills kill your dream of entrepreneurial success or the creation of a lifelong second income stream. Meet with the team at IRS Trouble Solvers today. We’ll work with you to identify your specific tax challenges, find all available options, and fix past issues as inexpensively as possible. Call today to make an appointment.