The story released this week about Michael “the Situation” Sorrentino and his tax issues is far too common in the entertainment industry. While in the Situation’s case, it looks like there were more fraudulent actions than a mere failure to pay taxes, but there is still a lesson to be learned for those that are self-employed.
If you are an employee of a company, you generally don’t have to worry about paying taxes during the year as taxes are automatically withheld from your paycheck (assuming the amount is adequate). When you are self-employed, there is no automatic withholding, so this becomes an issue for many individuals when April 15th rolls around.
The first step for self-employed individuals is to determine your tax liability for the year and make quarterly estimated payments. Projecting the tax liability for the year is easier said than done, but making the estimated payments every quarter is a good starting point. One benefit of being self-employed is the amount of income on the 1099 is not your net income. Self-employed individuals can use a Schedule C to deduct certain business expenses from their income and reduce their overall tax liability.
Another consideration for self-employed individuals is being responsible for both sides of the payroll tax, unlike an employees, who are only responsible for one half (which is also taken out of the paycheck).
The important thing for self-employed individuals is to plan and pay, meaning plan for what your tax liability is for the year (including self-employment tax) and make sufficient estimated tax payments through out the year. Doing this will put you in compliance with the IRS and not lead to a “situation.”
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